tag:blogger.com,1999:blog-40544775763445670582017-12-10T19:07:31.391-08:00True ContrarianTrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comBlogger86125tag:blogger.com,1999:blog-4054477576344567058.post-61491460807420916702017-12-04T08:16:00.002-08:002017-12-06T05:19:04.475-08:00“The hard part is discipline, patience, and judgment.” --Seth Klarman<a href="https://3.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cWixrh0ws89_3crWPA-4ymwCPcBGAYYCw/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="118" data-original-width="108" height="200" src="https://3.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cWixrh0ws89_3crWPA-4ymwCPcBGAYYCw/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><a href="https://3.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cWixrh0ws89_3crWPA-4ymwCPcBGAYYCw/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><br /><b>TAXES DROP; STOCKS DROP MORE (December 3, 2017): </b>The financial markets have behaved very differently during the past week than they have done during the entire bull market which began in early March 2009, and the anticipated "success" of the Republican tax plan is largely responsible for it. From now on, any negative economic event or trend will be blamed on the new U.S. tax rates. If we have inflation, recession, rising unemployment, or even a lengthy losing streak by the New York Yankees, it will have been "caused" by Trump and the Republicans. In case you think this is an exaggeration, Barack Obama was able to win the U.S. Presidency in November 2008 partly from blaming the recession on the 2001 tax cut which had occurred 7-1/2 years earlier. The Republicans have taken charge and responsibility for everything that happens with the U.S. stock market going forward, and at the worst possible time. The legislation also provides a convenient excuse which millions of investors will use as justification for selling. Whenever investors have a reason to act, they will be far more likely to do so.<br /><br /><strong><span style="color: #44dd44;">The past week was accompanied by several key reversals.</span></strong><br /><br />FAANG and similar stocks, which had been among the top performers in 2016-2017, suddenly began to struggle during the past week. Semiconductor shares behaved likewise. The most undervalued stocks were among the biggest winners. The Russell 2000, which had been persistently lagging the S&amp;P 500, briefly soared to a new all-time top before once again sliding lower and pointing the way down for everything else. Just when investors have become convinced that the U.S. stock market can only go up as long as Donald J. Trump remains the U.S. President, we have probably begun some of the largest percentage declines for most U.S. equity indices since the 1929-1932 collapse which was the worst in U.S. history. By many measures, the U.S. stock market has never been more overvalued even including 1929 and 2000, and we are likely to reverse toward a roughly equal and opposite extreme of undervaluation in roughly two years.<br /><br /><strong><span style="color: #44dd44;">Any non-bipartisan tax plan must fail, because so many people want it to do so.</span></strong><br /><br />The next recession will give Democrats enormous voter support in upcoming elections as the Republican tax bill will be given almost all of the credit for the economic slowdown. We would have suffered a stock-market slump and a recession even with the old tax code, but people love to imagine nonexistent cause-and-effect relationships in the financial markets because as humans we prefer easily repeatable stories to reality. The Republican tax plan is the perfect excuse for inventing a new set of myths about why the U.S. stock market is behaving differently and why it will experience an accelerating downtrend. A "surprise" decline for U.S. equity indices in 2018, especially as it will immediately follow the tax cut chronologically, will almost surely cause Democrats to regain control of the House of Representatives following the November 6, 2018 elections. The Senate is less certain since only 8 Republicans are up for re-election versus 25 Democrats, but there is probably more than a 50-50 chance that Democrats will prevail there also. As long as Trump remains President, this won't result in significant legislative changes in 2019 or 2020, but on November 6, 2020 we could have the Democrats sweeping the Senate, the House of Representatives, and the Presidency. Even though that is far from certain and almost anything can happen in three years, a tax cut almost always leads to increased selling as experienced long-term investors decide to capitalize upon lower rates to unload assets which they have held for years or decades. Knowing what might happen in November 2020, and especially the likelihood of much higher U.S. taxes becoming law in 2021, this leaves only a three-year window to get out at favorable rates. Thus, the Republican tax cut will encourage investors to sell first to get out ahead of everyone else. The market probably won't even be able to sustain itself until the lower rates become effective on January 1, 2018, since experienced investors know that many others will try to get out in early 2018. This could lead to meaningful losses in the final weeks of 2017, which is perhaps partly responsible for why we began to see new intraday behavior during the past week which had been almost completely absent for the entire calendar year. In general, the most bearish intraday behavior consists of strength near the opening bell and progressive choppy weakness thereafter.<br /><br /><strong><span style="color: #44dd44;">Previous tax cuts have almost always led to lower prices for U.S. equity indices.</span></strong><br /><br />The 1981 and 2001 tax cuts were followed by lower prices as the most experienced investors sold first, gradually working its way down to the least-knowledgeable participants bailing out just before the subsequent rebound began. It will likely be the same this time, with top corporate insiders being the first to sell and average investors roughly two years from now probably making their largest outflows in history and thus surpassing the previous all-time records--which not surprisingly were mostly set during the first quarter of 2009. Amateurs will repeatedly buy high and sell low. The 1986 tax cuts were followed by only a moderate correction and eventual (although temporary) new highs the following year, but in that case the tax cuts were expected to persist for the long run since they were bipartisan. Democrats can't wait to enact completely new and higher taxes as soon as they have sufficient numbers to be able to do so. With just three years to get out, it will be a race where the losers will be anyone who plans to hold U.S. assets for the long term. This includes not only stocks but corporate bonds, real estate, and most other U.S.-based assets.<br /><br /><strong><span style="color: #44dd44;">Surging deficits will translate into significant changes for asset valuations.</span></strong><br /><br />Rising inflation hasn't been a serious concern for U.S. investors since the 1980s. That is going to change and probably quickly, as the tax cut adds over one trillion additional dollars to the total U.S. debt obligation. If U.S. stocks quickly retreat then U.S. Treasuries might benefit as a safe-haven alternative in the short run, but over the next year it is likely that the U.S. Treasury yield curve will continue to flatten and that most U.S. Treasuries could climb to their highest yields in several years. This will end up slowing the U.S. economy even more than a tax hike would have done, and it will have a more lasting effect. Companies like commodity producers along with emerging-market stocks which benefit from rising inflationary expectations will likely be among the biggest winners. Many gold mining and silver mining companies, along with energy shares, rebounded energetically during the first several months of 2016 from multi-decade bottoms. Afterward, they stalled as investors' favorites dominated the list of winners from the summer of 2016 until recently. The leadership is likely to shift back into commodity producers and other inflation-loving assets during the upcoming year, partly from the tax cuts and partly from the fact that these are typically outperforming securities whenever we are transitioning from a bull market--especially a hugely overextended one--to what will likely become an especially severe bear market.<br /><br /><strong><span style="color: #44dd44;">The dividend yield on the S&amp;P 500 dropped to 1.89% during the past week.</span></strong><br /><br />Many historic valuations have never been more extreme in their entire history including a dividend yield of merely 1.89% for the S&amp;P 500 during the past week. Whether you look at the margin-adjusted Case-Shiller price-earnings ratio, or the differential between bulls and bears in various investment surveys, or the all-time record low ratios of bank accounts and other safe time deposits to fluctuating assets, or whatever is your favorite indicator, you will see extremes that have never been previously experienced even if you go back to 1790 when the Philadelphia Stock Exchange was founded (the New York Stock Exchange took two more years before they officially began in 1792).<br /><br /><strong><span style="color: #44dd44;">I haven't even discussed the unfairness of the Republican tax plan.</span></strong><br /><br />Cutting corporate tax rates too drastically, disproportionately favoring certain people, and treating different kinds of income with a complex series of diverging tax rates are just a few of the serious problems with the latest legislation. If it had been bipartisan then there would be some incentive to improve it, but the Republicans will be happy to live with it regardless of its serious defects while the Democrats will be thoroughly delighted to leave it alone so it can fail and be blamed for just about everything which goes wrong. It is a formula for disaster and that is exactly what we will get.<br /><br />It's going to be a long bumpy road to the bottom.<br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />There are numerous ridiculously overvalued assets today and a few undervalued sectors. The multi-decade commodity-related and emerging-market undervaluations of late 2015 and early 2016 are gone, but I have been continuing to gradually purchase energy shares along with funds of gold mining and silver mining companies whenever they are most gloomily reported in the media, are forming higher lows, and when investor outflows have been maximally intense. In a world where U.S. equity indices, junk bonds, and real estate have finally begun major bear markets amidst massive all-time record inflows mostly from investors taking money out of their bank accounts, the post-election love affair with wildly overpriced favorites is in the early stages of transitioning to a new set of investors' darlings which will persist for most of 2018 followed by a synchronized collapse in 2019. The election of Donald J. Trump as U.S. President led to a "yuge" surge in investors' expectations which following a one-year surge to all-time record highs is being transformed into the most severe U.S. equity bear market since 1929-1932. The absurd popularity of cryptocurrencies, with no intrinsic value, is highly characteristic of a generational peak in anything from tulips to worthless canal/railroad/internet shares. I have recently purchased GDXJ which remains a compelling bargain below 32 and which historically performs well following Fed rate hikes, and had been buying URA prior to its recent uptrend primarily because it had been underperforming other energy producers. Energy shares had been among the biggest winners since late August after spending the first eight months of 2017 as the worst-performing major sector. I also bought a little HDGE as it dropped below 8 for the first time. My largest recent short addition has been IWM which tracks the Russell 2000 and which briefly soared to a new all-time high. I had been selling short NFLX, NVDA, and AMZN until all three of these huge favorites began forming lower highs during the past several trading days. I also added new short positions in XLI. From my largest to my smallest position, I currently am long GDXJ (some new), TIAA-CREF Traditional Annuity Fund, KOL, SIL, XME, HDGE (some new), GDX, EWZ, URA (some relatively new), REMX, NGE, RSX, GXG, I-Bonds, ELD, FCG, GOEX, bank CDs, VGPMX, money market funds, BGEIX, OIH, SEA, NORW, VNM, TLT, PGAL, EPU, RGLD, WPM, SAND, SILJ, and FTAG. I have short positions in IWM (many new), AMZN (some new), NFLX (some relatively new), NVDA (some relatively new), IYR, XLU (some relatively new), XLI (some new), FXG, and SPHD, in that order, largest to smallest.<br /><br />As a general principle, I strongly believe in buying into the most panicked all-time record outflows while selling into the most intense inflows. Not counting short sales, during the past year I have done my heaviest selling since the first half of 2008 to close out profitable long positions which suddenly became trendy including COPX, BCS, RBS, EWW, TUR, LIT, EPOL, and BRF. I plan to sell even more aggressively in 2018 whenever the public makes all-time record inflows into my holdings while insiders have greatly increased their selling relative to buying. This is partly because I own many securities which tend to perform most strongly when we are transitioning to a major U.S. equity bear market, and partly because I expect 2019 to eventually transition to a full-fledged collapse for nearly all global assets. With my short positions, whenever VIX surges upward I will do a combination of partially covering and partially selling covered puts, depending upon how high their implied volatilities climb during any correction.<br /><br /><strong><span style="color: #44dd44;">Those who respect the past won't be afraid to repeat it.</span></strong><br /><br />I expect the S&amp;P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market nadir occurring roughly two years following its zenith. During the 2007-2009 bear market, most investors in August 2008 didn't realize that we were in a crushing collapse. We already have numerous classic negative divergences including junk bonds sliding to multi-month lows, the Russell 2000 struggling to keep up with new all-time highs for better-known large-cap U.S. equity indices (Dow, S&amp;P, Nasdaq), semiconductors suddenly reversing their extended uptrends, previous investors' favorites underperforming, fewer 52-week highs and more 52-week lows, the strongest intraday behavior near the opening bell when amateurs are the most eager buyers, and closed-end fund discounts climbing from rare lows. Expecting several more years of gains for the U.S. stock market is like anticipating that a 100-year-old marathon runner will continue to complete marathons for a few more decades. Far too many investors--even the most left-wing Democrats--believe that U.S. assets will keep climbing as long as Donald J. Trump remains the U.S. President. There is also a little-known megaphone formation in which the S&amp;P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&amp;P 500 approaching or sliding below its March 6, 2009 nadir of 666.79. Even if it doesn't plummet quite that deeply, a two-thirds loss would put the S&amp;P 500 below 900 which I believe is nearly certain but which almost no one currently believes is remotely possible. Far too many conservative investors took their money out of safe time deposits since they didn't want guaranteed yields of one percent; they have no idea what to do during a bear market and will inevitably end up making all-time record outflows as we are approaching the next historic U.S. stock-market bottoming patterns.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-59029329908911616312017-09-18T12:18:00.001-07:002017-09-18T12:18:43.516-07:00“There is nothing riskier than the widespread perception that there is no risk.” --Howard Marks<a href="https://3.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cWixrh0ws89_3crWPA-4ymwCPcBGAYYCw/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="118" data-original-width="108" height="200" src="https://3.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cWixrh0ws89_3crWPA-4ymwCPcBGAYYCw/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><a href="https://3.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cWixrh0ws89_3crWPA-4ymwCPcBGAYYCw/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><b>JUMPING OFF A ROOF (September 17, 2017):</b> When I was in kindergarten the boys used to get together during recess and play word games. A popular one was to suggest two methods of dying and ask which one we would prefer: would we rather be slowly eaten by ten thousand fire ants or burned at the stake by cannibals who planned to devour us afterward? Another popular game was to pose rhetorical questions about unpalatable situations: if one of us jumped off a roof of a tall building downtown then would the rest of us also jump to show solidarity? On the way down, would we say to ourselves, "everything's fine so far"? I often wondered, and still do, if girls similarly engage in such whimsical disaster banter.<br /><br />The financial markets today are serving as a repeat of my impossible childhood decisions. Would I rather buy Amazon with a price-earnings ratio above 500 (they earned 40 cents per share last quarter) or would I prefer to own Netflix at merely 222 times earnings? Would I rather purchase real estate in Vancouver or San Francisco, given that housing prices in many neighborhoods in those cities are selling for more than ten times the household income in those neighborhoods?<br /><br /><strong><span style="color: #44dd44;">If everyone is jumping off the roof, my favored bet is assuming that they will fall to the ground rather than ascending into the sky.</span></strong><br /><br />Call me Ishmael or call me misguided, but I have no doubt that eventually investors won't be willing to pay any price for today's Nasdaq favorites. Exactly how depressed Amazon, Netflix, and Nvidia will become is uncertain but I think that 2000-2002 and 2007-2009 are useful guides to the future since the past repeats itself a lot more consistently than most people realize. I began selling short Amazon above one thousand, shorted it all the way up, and continue to add to my short position whenever Amazon reaches one thousand as it did during the past week. I believe that Netflix and Nvidia are also absurdly overvalued, and have begun shorting it less aggressively than I am doing with Amazon. If Amazon and Netflix want to be able to grow at a sufficiently rapid rate to justify their current prices, then they will have to go well beyond the solar system and find a new batch of intergalactic consumers. Even if this happens, the free shipping to another solar system might erode profit growth.<br /><br />A friend of mine has owned Amazon shares for years, even suffering through their 94% collapse near the beginning of the century. I asked him why and he told me that there will always be another batch of stupid people who will pay a higher price for it. Somehow I don't think that's sufficient reason to own anything. Given the trillions of dollars which have exited bank accounts in recent years where such people have never previously invested in fluctuating assets, it is hardly surprising that they would select names like Amazon and Netflix with which they are personally familiar. If they order packages from Amazon--as I also happily do since they don't mind operating that business at a loss--and they pay 7.99 per month for Netflix, then it's hardly surprising that they would prefer to purchase those shares rather than those of far more compelling energy shares. As usual, the media has been happy to parrot meaningless and misleading hype about an alleged energy glut and why prices will remain low indefinitely--until after they soar higher, at which point they'll talk about a "global energy shortage" and give you plenty of plausible-sounding but false reasons why it was inevitable that energy rallied strongly.<br /><br /><strong><span style="color: #44dd44;">Investors are too easily misled by whatever has happened during the past few years.</span></strong><br /><br />Without thinking about it, nearly all investors are overwhelmed by the recency bias in which their decisions are heavily influenced by whatever has happened lately. They are also easy prey for believing nonsensical price targets by anyone who wishes to proclaim them--with many of these so-called gurus having recently graduated from MBA programs and who were busy studying for their SAT tests in high school when the last bear market occurred. If someone throws around a meaningless 250-dollar price target for Nvidia then that becomes the anchor upon which millions will make buying and selling decisions; this partly explains how Amazon was able to reach one thousand.<br /><br />In 2009-2012, the 2007-2009 bear market was fresh in people's memories and there were mostly net withdrawals from U.S. equity funds. Now that more than 8-1/2 years have passed since the bear market, it seems emotionally as far away as the era of the dinosaurs and thus investors are completely unconcerned with taking risks. This is evident in VIX plummeting to an all-time bottom of 8.84 on July 26, 2017, minutes after the Fed's 2 p.m. rate announcement. Since then, VIX made a higher low of 9.52 on August 8 and is completing another higher low in September. Only the most experienced investors are bothering to hedge themselves against a downturn, with many institutions figuring that doing so is an unnecessary waste of money. After hurricanes Katrina and Rita devastated the southeastern U.S., prices for hurricane insurance quintupled which encouraged Warren Buffett to sell it the following year. Investors will once again be eager to insure their portfolios against loss, but only after there has already been a substantial correction and such insurance becomes outrageously expensive. Protecting against a disaster is seen as irrelevant until it is too late to act.<br /><br /><strong><span style="color: #44dd44;">Precious metals mining shares and energy companies are among the best remaining bargains.</span></strong><br /><br />In late 2015 and early 2016, nearly all commodity-related and emerging-market assets had become irrationally undervalued, with some of them trading at their lowest prices in decades. Emerging-market securities enjoyed one more period of notable underpricing shortly following Trump's election when the media were almost universally bearish toward them, but now that they have far outperformed most other investments in 2017 the media have turned almost unanimously favorable toward them. The main negativity remains with gold mining and silver mining shares which aren't as frequently derided as they had been around January 20, 2016 before they mostly doubled, but are usually dismissed as being unpredictable or worse. As for energy shares, the <i>Wall Street Journal</i> devoted its entire back page on Monday, August 28, 2017 to the hopelessness of purchasing anything in this sector. Since then there have been moderate rebounds from deeply undervalued levels. FCG, a fund of natural gas producers, is one of my favorite choices in this sector with OIH, URA, and KOL also worthwhile. FCG could double or triple from its recent bottom and would still be far below its top of June 23, 2014, while the others above could enjoy dramatic gains during the upcoming year. Insiders of energy companies during the past several trading days have been notable buyers of their own shares.<br /><br />Energy shares have almost always been lagging performers, being among the last winners immediately before any severe bear market is approaching its downward accelerating phase. In years including 1981 and 2008, energy shares were among the biggest winners after the Russell 2000 had already begun its downtrend. In 2017, it is possible that the Russell 2000 and its funds including IWM peaked on July 25, 2017, the day before that month's Fed meeting. Even though the S&amp;P 500 and many other large-cap equity indices have repeatedly set new all-time highs since then, the Russell 2000 has so far been unable to do so. This was also a feature in 2007 in which the Russell 2000 completed a double top on June 1 and July 9 while the S&amp;P 500 completed its intraday zenith on October 9, 2007 and the Nasdaq did so on October 31. A look back at 1929, 1937, and 1973 shows nearly identical behavior prior to a severe bear market each time.<br /><br /><strong><span style="color: #44dd44;">Very few investors pay attention to fund flows.</span></strong><br /><br />Fund-flow data has been available for open-end mutual funds for decades and for exchange-traded funds since their inception. However, similar to insider buying and selling, hardly anyone pays attention to it. It has been proven academically that all-time record inflows consistently precede periods of poor performance, whereas all-time record outflows are almost always followed by huge bull markets. The biggest monthly outflow in history from most U.S. equity funds was in February 2009, while the biggest inflows have mostly been in 2017 which surpassed their previous all-time record inflows from 2016. According to <i>Barron's</i>, total net inflows into U.S. exchange-traded funds during the first eight months of 2017 totaled 295 billion dollars, thereby outpacing the total net inflow of 285 billion for all of calendar year 2016. Top corporate insiders have not been so easily fooled, with among the highest ratios of total selling to buying ever recorded for top corporate executives for 2017.<br /><br />We had all-time record outflows for precious metals shares during the second quarter of 2017 and all-time record outflows for most energy funds throughout 2017. For example, the outflows from both GDX and GDXJ were four to five times their previous records.<br /><br /><strong><span style="color: #44dd44;">Real estate remains among the most overpriced in history in many parts of the world.</span></strong><br /><br />In 2001, there were numerous neighborhoods in Arizona, Florida, Nevada, and elsewhere where housing prices sold for less than 1.5 times average household incomes. In 2017, there are places where this ratio is greater than ten to one. The long-term historic average is almost exactly three, so this does not bode well for real-estate prices. This poses a serious problem to the economy since many people have purchased real estate almost entirely using borrowed money, and will thus be underwater even with moderate price losses. While there aren't as many subprime loans in 2017 as there had been in 2007, valuations are in many cases far higher and thus present much greater percentage risks to the downside.<br /><br />You might think that the average 34% decline for U.S. housing prices in 2006-2011 would convince people that housing prices don't always go up, but apparently the latest fantasy is that the previous bear market was the only one in their lifetimes and from now on housing prices will keep climbing indefinitely. If reality were presented as a television mini-series then no one would believe it. Truth is indeed stranger than fiction.<br /><br /><strong><span style="color: #44dd44;">There are other worthwhile short positions besides AMZN, NFLX, and NVDA.</span></strong><br /><br />Obviously the above three Nasdaq favorites are far from the only irrationally overpriced securities today, although they are among the most extreme. Utilities have never been more expensive in history, making funds like XLU worthwhile shorts, while funds of industrial shares including XLI are also ideal short positions. For pure diversification, selling short IWM which matches the Russell 2000 capitalizes upon the average price-earnings ratio for that basket of two thousand U.S. companies sporting by far its highest-ever price-earnings ratio in history.<br /><br />In kindergarten we would always ask ourselves, "How terrible can it get?" While being devoured by wild beasts may have been our biggest fear in those days, it is far more perilous to be blissfully unconcerned with dangerously high overvaluations. Investors often mention in surveys that they are worried about terrorism, Chinese GDP growth, or whichever monsters are most frequently mentioned in the mainstream financial media. Hardly anyone is terrified as I am by the greatest overvaluations in history for most assets, the greatest-ever reliance on borrowed money, and especially the pervasive lack of worry.<br /><br />We have nothing to fear but complacency itself.<br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />There are numerous ridiculously overvalued sectors in the world today and fewer undervalued ones. The incredible bargains of late 2015 and early 2016 are gone, but I have been continuing to gradually purchase energy shares along with funds of gold mining and silver mining companies whenever they are most gloomily reported in the media and when investor outflows have been maximally intense. In a world where real estate along with U.S. equities and junk bonds have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with wildly overbought four-letter favorites is in the very early stages of transitioning to a completely new set of investors' darlings. The election of Donald J. Trump as U.S. President initially led to a "yuge" surge in investors' expectations which have not been validated by reality; soaring price-earnings ratios have caused the U.S. stock market to become the most dangerous game. It is timely to sell short those Nasdaq favorites which are most overpriced, along with those funds with the heaviest insider selling and the most intense all-time record investor inflows. So far in 2017 we have experienced new all-time records for total insider selling of U.S. equities and all-time record net investor inflows into many U.S. equity funds. I have recently purchased FCG, OIH, GDXJ, HDGE, and URA in that order while selling short XLU, XLI, AMZN, NFLX, NVDA, and IWM. I had also bought EWZ when it suddenly plummeted over 21% to 31.78 on May 18, 2017 due to a political scandal which as with nearly all geopolitical developments exerts essentially zero impact on Brazilian corporate profits. From my largest to my smallest position, I currently am long GDXJ (some new), TIAA-CREF Traditional Annuity Fund, KOL, SIL, XME, HDGE (some new), GDX, EWZ, URA, REMX, NGE, RSX, GXG, I-Bonds, ELD, GOEX, FCG (many new), bank CDs, VGPMX, money market funds, BGEIX, OIH (some new), SEA, NORW, VNM, TLT, PGAL, EPU, RGLD, WPM, SAND, SILJ, and FTAG. I have short positions in AMZN (many new), IYR, XLU (some new), XLI (some new), NFLX (some new), FXG, NVDA (some new), and SPHD, in that order, largest to smallest. U.K. banks in particular were huge winners, with BCS (Barclays) enjoying an enormous increase since June 27, 2016 from 6.89 to 11.61 when I sold it in early February, plus some dividends as shares along the way. In 2017, EWW and TUR went from being widely detested in January to being eagerly purchased a few months later. This highlights the advantage of buying aggressively into the most severe panic selloffs while selling into the most intense excitement.<br /><br /><strong><span style="color: #44dd44;">Those who respect the past won't be afraid to repeat it.</span></strong><br /><br />I expect the S&amp;P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom probably occurring at some unknown point in 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current (or recently ended) U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices in recent months, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to continue as long as he is in office, nearly all of the anticipated future gains have likely already occurred. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&amp;P 500 by roughly 3:2 from the nadir in early March 2009 through early March 2014, with IWC--a fund of even smaller U.S. companies--also significantly outperforming the S&amp;P 500 in percentage terms. Since then, both IWM and IWC have struggled, with IWM only modestly surpassing its December 9, 2016 intraday high of 138.82 several times and always falling back afterward, while IWC marginally surpassed its December 20, 2016 peak of 87.82 several times before failing to follow through each time. While the S&amp;P 500 has made numerous higher highs since July 25, 2017, the Russell 2000 and IWM have not surpassed their zeniths from that day. Small-cap shares similarly underperformed at important past stock-market zeniths prior to severe bear markets including September 1929, January 1973, and October 2007. There is also a little-known megaphone formation in which the S&amp;P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&amp;P 500 approaching or sliding below its March 6, 2009 nadir of 666.79. Even if it doesn't plummet that deeply, I expect a two-thirds loss to roughly 833 or lower for the S&amp;P 500. Far too many conservative investors took their money out of safe time deposits since they didn't want yields of 1% or less; they have no idea what to do during a bear market. They have no concept of valuation or historical behavior and have been purchasing Amazon and Netflix because they are familiar with those names from their daily lives. It is the best of times and it is the worst of times.<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-37815906887592698192017-07-11T06:34:00.002-07:002017-07-11T06:34:45.843-07:00 “Value investing is at its core the marriage of a contrarian streak and a calculator.” --Seth Klarman<a href="https://3.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cWixrh0ws89_3crWPA-4ymwCPcBGAYYCw/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="118" data-original-width="108" height="200" src="https://3.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cWixrh0ws89_3crWPA-4ymwCPcBGAYYCw/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>OVERLAPPING OVEREXTENDED OPPORTUNITIES (July 10, 2017):</b> Some investors who are momentum players attempt to identify the most overextended trends and to chase after them in the hope that they become even more extreme. Others attempt to identify key turning points so they can buy or sell near the exact bottom or top. I prefer a different approach: identifying trends which have already been underway for weeks, months, or years, but aren't acknowledged because they go against the popular myths of the day. It thus becomes possible to bet on a horse which is a favorite when everyone is giving it unusually long odds against it happening. In this way, bets which should be even money will pay off far more than the downside risk you are assuming in your trading. Fortunately, we have more than the usual number of trends which fit into this ideal category at the present time.<br /><br /><strong><span style="color: #44dd44;">U.S. equities have been in stealth bear markets since December 2016, but almost no one recognizes them because a tiny number of very popular shares have enjoyed huge gains so far in 2017.</span></strong><br /><br />Is the U.S. stock market up or down from its highs of December 2016? Most investors would immediately respond that it was higher, because they are bombarded with media stories proclaiming new all-time highs for the Dow, for the Nasdaq, for the S&amp;P 500, and for seemingly just about every other U.S. index. However, if you examine the data more carefully you will soon realize that these well-known benchmarks have been able to achieve repeated higher highs almost entirely because of only one or two dozen huge winners which are disproportionately represented in these indices.<br /><br />Take a look at IWM, a fund which invests in the Russell 2000 and which had reached a high last year of 138.82 on December 9, 2016. This fund is higher today--but by only about one percent even if you include all reinvested dividends. A one-percent climb in seven months is not much of a bull market, especially since the two thousand companies represented in this index total more than half of the 3599 total listed U.S. companies. If you prefer, you can look at IWC which had reached 87.82 on December 20, 2016, and which has similarly gained only about one percent since then. Many investors intuitively realize that this must be the case, because when they look at their quarterly statements ending June 30, 2017 they discover that their accounts have barely increased from their levels of the end of 2016.<br /><br /><strong><span style="color: #44dd44;">Underperformance by smaller U.S. companies is much more bearish than simply fewer stocks remaining in bull markets.</span></strong><br /><br />It's not just a case of fewer U.S. stocks being in bull markets; what is essential is that when small stocks are notably underperforming large-cap favorites then this behavior is almost always followed by a severe bear market. If you look back at August 1929, January 1973, and October 2007, what all of these have in common is that small stocks had already been underperforming the best-known favorites by anywhere from several months to more than a year. Once funds like IWM and IWC struggle to make new all-time highs while the S&amp;P 500 does so routinely, the clock is ticking on the bull market and a significant correction or worse lies just around the corner. While this is one of the most reliable patterns in the financial markets, it is also among the least appreciated.<br /><br /><strong><span style="color: #44dd44;">Here is a quiz: which are the top-performing funds since late 2015 and early 2016?</span></strong><br /><br />If you were to ask ten thousand people this question, most of them would probably respond that technology shares were the biggest winners, with some perhaps guessing industrial or infrastructure shares. Almost no one would correctly state that commodity producers and commodity-related emerging market equities have been almost exclusively the only funds represented in the top 50 and predominantly in the list of the top 100 unleveraged funds going back to the early weeks of 2016. The reason is primarily that big-name technology shares including NVDA and NFLX have received persistently positive media coverage, whereas the media rarely talk about mining or energy companies. In addition, since most commodity producers and emerging markets had suffered multi-year severe downtrends from April 2011 through January 20, 2016, many analysts who used to follow these sectors ended up switching to other sectors or haven't been taken as seriously by most media outlets since then. A list of those funds which have doubled since their intraday lows of January 20, 2016 would be populated almost entirely with unfamiliar sectors including gold mining, silver mining, coal mining, base metals mining, along with stocks in countries such as Peru, Brazil, and Russia.<br /><br /><strong><span style="color: #44dd44;">Record inflows into U.S. equity funds in 2017 have been combined with all-time record insider selling.</span></strong><br /><br />The best time to buy into any sector is when top executives of companies in that sector have been heavy buyers of their own shares, while most investors are aggressively unloading them. This applies to nearly all energy shares in recent weeks, with all-time record outflows from many energy-related funds including FCG which is a fund of natural-gas producers that if it quintupled in price would still be below its top of June 23, 2014--just over three years ago. FCG has unusually intense buying of its components by insiders. There have been all-time record outflows from mining funds including actively-traded gold-mining funds GDX and GDXJ during the second quarter of 2017. GDXJ had a net outflow of more than 27% of its total market capitalization during April through June 2017. This did not stop GDXJ from making additional higher lows including 27.37 on December 20, 2016, 29.33 on May 4, 2017, 30.89 on May 24, 2017, and 30.97 at today's open (July 10, 2017).<br /><br />For most non-commodity sectors, insiders have never been heavier sellers than they have been in 2017, while investors have made all-time record inflows this year into most U.S. equity funds. Whenever insiders are doing the exact opposite of the public is when insiders are most likely to be proven right while the vast majority of investors will be on the wrong side. This is one reason that the rich get richer and the poor get poorer--the rich only follow each other, while the poor (really the working- and middle-class) do whatever just about everyone else is doing and which must therefore fail. Most investors are excited about buying stocks near all-time highs, while the most experienced investors are cautious and have been progressively selling into the most extended uptrends.<br /><br /><strong><span style="color: #44dd44;">One sure sign of a bull market for commodity producers is when the shares of the producers far outpace their respective commodities.</span></strong><br /><br />How can we tell whether gold mining shares or natural-gas producers are in true bull markets? One way is by measuring the percentage increase in a basket of producers versus the increase in the commodity itself. For gold mining, for example, GDXJ is a fund of junior gold mining companies which trades millions of shares daily. On January 20, 2016, GDXJ slumped to an all-time bottom of 16.87. Since then it paid a dividend of 1.507 U.S. dollars per share in December 2016. Meanwhile, GLD which tracks gold bullion slid to an intraday low of 104.94 also on January 20, 2016. If we compute the ratio of how much each of these has gained since then, we see that GLD or gold bullion using today's closing numbers (July 10, 2017) is up by (115.47-104.94)/104.94 = 10.03% while GDXJ has gained (32.06-16.87+1.507)/16.87 = 98.97%. The ratio between these two is over 9.86 to 1. This is more than twice its historic average and thereby signals that the rally for precious metals and the shares of their producers is likely to continue. Additional supporting evidence can be seen in the Daily Sentiment Index, a survey of futures traders that has been tracked for decades; as of July 7, 2017 it showed only 10% of investors who were bullish toward gold and 9% who were bullish on silver.<br /><br /><strong><span style="color: #44dd44;">The traders' commitments are at simultaneous historic extremes for gold, silver, and platinum.</span></strong><br /><br />The traders' commitments last week showed that commercials--the equivalent of insiders for any futures contract--were net short (238,416-131,190) or 107,226 contracts. This was their lowest total since February 9, 2016 when the rallies for precious metals and their producers had barely begun. For silver, commercials were net short 39,228 contracts, their lowest net total since January 19, 2016. For platinum, commercials were only net short 12,598 contracts which is their lowest reading since the last recession. You can see a chart of gold's traders' commitments here: notice the shrinking maroon bars. Substitute SI.png and PL.png for GC.png to see silver and platinum respectively:<br /><br /><li><a href="http://snalaska.com/cot/current/charts/GC.png" target="_blank">Gold's Traders' Commitments, Current</a></li><br /><br /><strong><span style="color: #44dd44;">VIX has been forming a pattern of higher lows from a multi-decade bottom, which historically is especially bearish for U.S. equity indices.</span></strong><br /><br />People are often confused by VIX. Its most bullish behavior is when it has been forming a pattern of lower highs following a multi-decade top, as it did starting in October 2008. This was an early signal that we were transitioning from a major bear market to a powerful bull market. Now we have the exact opposite situation, where VIX slid to 9.37 on June 9, 2017--the same day that the Russell 2000 and the Nasdaq completed their respective zeniths (so far). On that day, VIX slid to 9.37 where it hadn't traded since it had touched 8.89 on December 27, 1993--almost 23-1/2 years earlier. Since then, VIX has made several higher lows including 9.68 on June 26, 2017 and 9.73 on June 29, 2017.<br /><br />Until VIX climbs to another multi-decade high and begins to form lower highs over a period of weeks or months, it is probably premature to purchase most funds of U.S. equities.<br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />Whenever they have appeared to be especially irrationally depressed, I have been purchasing the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate along with U.S. equities and junk bonds have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with wildly overbought four-letter favorites is in the process of transitioning to a completely new set of investors' darlings. The election of Donald J. Trump as U.S. President has led to a "yuge" surge in investors' expectations which have not been validated by reality; soaring price-earnings ratios are far more dangerous than rising earnings. The latest illogical pullbacks for most commodity producers has encouraged me to add to these sectors. It is timely to sell short those funds with the heaviest insider selling and the most intense all-time record investor inflows. So far in 2017, we have experienced new all-time records for total insider selling of U.S. equities and all-time record inflows into many U.S. equity funds. I have recently purchased GDXJ, FCG, OIH, URA, and HDGE while selling short XLI and AMZN. I also bought EWZ when it suddenly plummeted over 21% to 31.78 on May 18, 2017 due to a political scandal which will have essentially zero impact on Brazilian corporate profits. From my largest to my smallest position, I currently am long GDXJ (some new), SIL, KOL, XME (some new), GDX, EWZ (some new), RSX (some new), URA (some new), HDGE (some new), ELD, FCG (many new), GOEX, REMX, VGPMX, GXG, NGE, OIH (many new), BGEIX, SEA, VNM, NORW, PGAL, RGLD, SLW, SAND, TLT, SILJ, and FTAG. I have short positions in IYR, XLU, XLI (some new), FXG, AMZN (some new), and SPHD, in that order, largest to smallest. U.K. banks in particular were huge winners, with BCS (Barclays) enjoying an enormous increase since June 27, 2016 from 6.89 to 11.61 when I sold it in early February, plus some dividends as shares along the way. In 2017, EWW and TUR went from being widely detested in January to being eagerly purchased a few months later. This highlights the advantage of buying aggressively into the most severe panic selloffs while selling into the most intense excitement.<br /><br /><strong><span style="color: #44dd44;">Those who respect the past won't be afraid to repeat it.</span></strong><br /><br />I expect the S&amp;P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom probably occurring at some unknown point in 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current (or recently ended) U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices in recent months, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to continue as long as he is in office, nearly all of the anticipated future gains have likely already occurred. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&amp;P 500 by roughly 3:2 from the nadir in early March 2009 through early March 2014, with IWC--a fund of even smaller U.S. companies--also significantly outperforming the S&amp;P 500 in percentage terms. Since then, both IWM and IWC have struggled, with IWM barely surpassing its December 9, 2016 intraday high of 138.82 several times and always falling back afterward, while IWC marginally surpassed its December 20, 2016 peak of 87.82 several times before failing to follow through each time. Small-cap shares similarly underperformed at important past stock-market zeniths prior to severe bear markets including September 1929, January 1973, and October 2007. There is also a little-known megaphone formation in which the S&amp;P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&amp;P 500 approaching or sliding below its March 6, 2009 nadir of 666.79. Even if it doesn't plummet that deeply, I expect a two-thirds loss from 2454 to 818 for the S&amp;P 500. Far too many conservative investors took their money out of safe time deposits since they didn't want yields of 1% or less; they have no idea what to do during a bear market.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-73358866651967561122017-05-11T14:05:00.003-07:002017-05-11T14:05:56.568-07:00 “I've never walked the same path other people found comfortable and I'm not going to start now.” --Lora Leigh<a href="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>THE PIT AND THE PENDULUM (May 11, 2017):</b> It is relatively rare to have one group of assets being incredibly overvalued and another group being simultaneously underpriced, but that is the situation which has existed in May 2017. U.S. stocks, corporate bonds, and real estate have all never been higher in their entire histories even if you adjust for inflation--with the exception of the Nasdaq which in real terms had been higher on March 10, 2000 but has already surpassed twice its previous top on October 31, 2007. Real estate in many U.S. cities is at double or triple fair value based upon historic ratios of housing prices relative to household incomes. At the same time, we have experienced incredibly low prices for many shares of companies involved with commodity production. Most mining companies slid to their lowest points in early May since December or November 2016, while many energy shares recently traded close to one-year bottoms. Nearly all commodity-related securities had completed severe extended bear markets which had lasted in most cases from April 2011 through January 20, 2016, but their bull markets have been almost completely forgotten due to their extended corrections since the second week of February 2017.<br /><br /><strong><span style="color: #44dd44;">Some funds of commodity producers have suffered all-time record outflows and have enjoyed significant insider buying of their components.</span></strong><br /><br />For the one-month period ending Wednesday, May 10, 2017, the total net outflow from GDX was 1.72 billion--a new all-time record. The net outflow from GDXJ was also an all-time monthly record of 790.21 million--and since the total market capitalization of GDXJ at the close on May 10 was only 3.8 billion, this represented more than 20% of the entire fund which was withdrawn by a combination of panicked investors, momentum players switching to the short side, and some long-term holders disappointed that last year's strong initial rebound from January 20 through August 11, 2016 didn't last longer and emotionally seemed to have run into a wall. Other funds of commodity producers have also been weak since the second or third week of February 2017, with some of them trading at their lowest levels in more than a year. FCG, a fund of natural-gas producers, had the heaviest insider buying of all exchange-traded funds' components in 2017, and recently traded at less than one-fifth its June 23, 2014 dividend-adjusted peak of 113.84 (see&nbsp;<a href="http://stockcharts.com/" target="_blank">http://stockcharts.com</a>&nbsp;or any other reliable charting site).<br /><br /><strong><span style="color: #44dd44;">The funds with the biggest outflows are generally the biggest percentage winners of all funds since January 20, 2016.</span></strong><br /><br />The irony is that investors aren't unloading lagging shares--they are selling those funds which had generally been the biggest winners from their historic bottoms of early 2016. If you look at a list of the top fifty funds from January 20, 2016, they consist almost entirely of securities which are primarily or entirely involved directly or indirectly with commodity production. They have gained far more than even the most aggressive technology sectors. However, most investors have remained obsessed with their favorites of recent years and after a brief fling with alternatives during the first several months of 2016--probably encouraged by weakness for U.S. equity indices around that time--they have mostly gone back into their old favorites again. This has caused already oversold and undervalued commodity-related securities to become even more compelling bargains, while many well-known U.S. equity indices have been setting frequent new all-time highs in recent months.<br /><br /><strong><span style="color: #44dd44;">Negative divergences for all U.S. assets are being widely ignored.</span></strong><br /><br />If you didn't hear about the Dow surpassing 20 and then 21 thousand, while the Nasdaq topped six thousand and then 6100, it's likely that you almost never check the internet or cable TV. These round-number benchmarks were so widely reported that it was the first time since the last bull-market top that these were often quoted in non-financial news headlines briefs. The Nasdaq surpassing six thousand was announced during a break in the Yankees' radio broadcast on WFAN. However, you hardly heard anyone mentioning that thousands of smaller U.S. companies were struggling to surpass their respective December 2016 highs. Almost no one discussed how many previous severe bear markets began similarly with ignored underperformance by smaller companies. The number of new 52-week highs has also been diminishing.<br /><br /><strong><span style="color: #44dd44;">Fewer and fewer shares are propelling well-known benchmark U.S. equity indices higher in 2017.</span></strong><br /><br />The S&amp;P 500 consists of 500 stocks (a related puzzle: who's buried in Grant's tomb?) but what is amazing is that only ten stocks out of that five hundred are responsible for 46% of the entire 2017 increase in this index:<br /><br /><li><a href="http://www.zerohedge.com/news/2017-05-11/just-these-ten-companies-account-half-sps-2017-returns" target="_blank">Just These Ten Companies Account for 46% of the S&amp;P 500's 2017 Gains</a></li><br /><br /><strong><span style="color: #44dd44;">VIX slid all the way down to 9.56 on May 9, 2017 for the first time since 2006.</span></strong><br /><br />The last time VIX was at 9.56 or lower was when it had completed a multi-year bottom of 9.39 on December 15, 2006. A VIX reading below 10 signals that most investors who have been hedging their portfolios through insurance every single year since 2009 have decided that it is a waste of money and unnecessary. Naturally, when the fewest investors have their portfolios insured, they are maximally likely to decline so the fewest participants make money (as always). One can perhaps understand how investors today would repeat the mistakes of 1929-1932 or 1973-1974 since those earlier episodes had occurred decades ago and getting detailed information about them is challenging. However, everyone today either remembers or can easily access voluminous information about 2000-2002 and 2007-2009. I guess they figure that we'll somehow miraculously avoid a third 21st-century collapse, but unfortunately it's already baked in the cards no matter what Trump, the Fed, Putin, or anyone else does. The Fed kept rates so low for so long that companies routinely borrowed very cheap money for a very long time and used it to purchase their own shares at inflated prices. Even the most frequently repeated games have to end sometime.<br /><br /><strong><span style="color: #44dd44;">I have done more selling than buying in 2017.</span></strong><br /><br />Especially if you count selling short as selling, I have done more selling than buying in 2017 which is a dramatic departure from 2016 when we had three key buying opportunities--during the first several weeks of the year for essentially all commodity producers and emerging-market securities, on June 27, 2016 for those assets which plunged the most in response to the Brexit vote, and near the end of the year when disappointed long-term holders did tax-loss selling and otherwise impatiently closed out positions just before strong early 2017 rallies. In most cases with some key exceptions like COPX, I didn't sell out of expectation of an impending collapse but due to previous worthwhile bargains becoming much less worthwhile. My guess is that the upcoming year will require even more selling than buying, especially as we approach the spring of 2018 when seasonally commodity producers often complete important topping patterns. As always, I will never sell because a particular price or time target is achieved, but only when there is aggressive selling by top corporate insiders in the sectors I own, massive fund inflows, especially optimistic sentiment, and persistently positive media coverage.<br /><br /><strong><span style="color: #44dd44;">The loonie remains the most compelling currency for purchase.</span></strong><br /><br />One can make an argument for the Australian dollar and even for several others, but the Canadian dollar has become one of the world's most detested assets. It's like Rodney Dangerfield--the loonie "can't get no respect." In the early morning of May 5, 2017, the loonie slid to 72.52 U.S. cents. This was shortly after crude oil had bottomed at its lowest point (43.76 U.S. dollars per barrel) since April 18, 2016 and the day after GDXJ had completed a key higher low at 29.33 while July platinum had similarly bottomed at 894.50 U.S. dollars per troy ounce for the first time since February 2016. When it rains, it pours. Nonetheless, the Canadian dollar has a history of enjoying especially strong uptrends as we are transitioning from a bull market to a bear market for U.S. equity indices. Partly this is since Canada has an unusually high ratio of commodities to people, and commodities--especially in the energy sector--often tend to be among the last assets to complete their bull markets prior to a global recession.<br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />Whenever they have appeared to be especially irrationally depressed, I have been purchasing the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with overpriced industrial shares will transition to a completely new set of investors' darlings. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 within roughly one year instead of continuing to rally to new 15-year peaks as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The election of Donald J. Trump as U.S. President means "yuge" U.S. government spending and modestly lower taxes which is a combination for a massive rise in the deficit. The latest illogical pullback for most gold mining and silver mining shares, along with natural gas producers, has encouraged me to add to these sectors, while some emerging markets have become no longer undervalued and were ripe for selling. As in late winter, it is once again timely to sell short those funds with the heaviest insider selling and the most intense all-time record investor inflows. So far in 2017, we have experienced new all-time records for total insider selling of U.S. equities. Thus, I have recently purchased GDXJ, FCG, URA, HDGE, GDX, and NGE while selling EWW, EWI, TUR, GREK, IDX, SOIL, RSXJ, and EPHE, and selling short XLI. From my largest to my smallest position, I currently am long GDXJ (many new), SIL, KOL, XME (some new), GDX (some new), EWZ, RSX, URA (some new), HDGE (some new), ELD, FCG (many new), GOEX, REMX, VGPMX, GXG, NGE (some new), BGEIX, SEA, VNM, NORW, PGAL, RGLD, SLW, SAND, SILJ, and FTAG. I have short positions in IYR, XLU, XLI (some new), FXG, and SPHD, in that order, largest to smallest. U.K. banks in particular were huge winners, with BCS (Barclays) enjoying an enormous increase since June 27, 2016 from 6.89 to 11.61 when I sold it in early February, plus some dividends as shares along the way. In just three months during 2017, EWW and TUR went from being widely detested in January to being eagerly purchased. This highlights the advantage of buying most aggressively into the most severe panic selloffs while selling into the most intense excitement.<br /><br /><strong><span style="color: #44dd44;">Those who respect the past won't be afraid to repeat it.</span></strong><br /><br />I expect the S&amp;P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom perhaps occurring near the end of 2018 or during the first several months of 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current (or recently ended) U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices in recent months, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to usher in four or eight more years of a bull market, nearly all of those gains have likely already occurred. Following the election of Narendra Modi in India on May 16, 2014, many analysts expected a bull market to continue for a full decade. The fund SCIF of a hundred small-cap Indian equities actually peaked on June 9, 2014 which was 24 days later; it has made a series of lower highs since then. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&amp;P 500 by roughly 3:2 from the nadir in early March 2009 through early March 2014, with IWC--a fund of even smaller U.S. companies--also significantly outperforming the S&amp;P 500 in percentage terms. Since then, both IWM and IWC have struggled, with IWM barely surpassing its December 9, 2016 intraday high of 138.82 twice and falling back both times, while IWC barely surpassed its December 20, 2016 peak of 87.82 and soon resumed its downtrend. Small-cap shares similarly underperformed at numerous past stock-market zeniths prior to severe bear markets including September 1929, January 1973, and October 2007. There is also a little-known megaphone formation in which the S&amp;P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&amp;P 500 approaching or sliding below its March 6, 2009 nadir of 666.79. Even if it doesn't plummet that deeply, I expect a two-thirds loss from 2400 to 800 for the S&amp;P 500. Far too many conservative investors took their money out of safe time deposits since they didn't want yields of 1% or less; they have no idea what to do during a bear market.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-40854001826386685232017-03-04T19:21:00.002-08:002017-03-04T19:21:36.428-08:00Thus in order to be a 'radical' one must be open to the possibility that one's own core assumptions are misconceived. --Christopher Hitchens<a href="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>FROM RICHES TO RAGS (March 3, 2017): </b>During the past week, some amazing historic tops have been formed for well-known U.S. equity indices. The S&amp;P 500 (SPY, VOO) soared above 2400 for the first time in history, representing a huge gain from its 666.79 intraday bottom of March 6, 2009. The Nasdaq (QQQ) is trading for double its previous top from 2007, while the Dow Jones Industrial Average (DIA) made headlines by surpassing 20 thousand and then 21 thousand in rapid succession. Since a sharp surge higher began on the day after Donald J. Trump was elected as U.S. President, many investors have concluded that this uptrend will continue for four or eight years depending upon whether or not Trump is reelected. However, this logic is just as misguided as when investors in early 2009 had nearly unanimously decided that the stock market would keep dropping because we had never experienced a subprime mortgage collapse before. There are clear signs that the post-Trump buying surge is entirely emotional and that we have already begun what will become the worst bear market since the Great Depression.<br /><br /><strong><span style="color: #44dd44;">Investors keep buying prior to major tops and selling shortly before historic bottoms.</span></strong><br /><br />One sad truth is that the average investor ends up actually behind after inflation, even with assets such as stocks and bonds which have long-term net gains after inflation. The reason is that investors emotionally buy high and sell low and keep repeating this pattern. Prior to 2017, the biggest inflows generally occurred in months including February 2000 when most funds of technology shares experienced their heaviest inflows ever recorded, before or since. Afterward, from March 10, 2000 through October 10, 2002, the Nasdaq plummeted 78.4%. In February 2009, most funds of U.S. equities experienced their largest-ever monthly outflows. Not surprisingly, this was followed by the eight-year bull market which stands as one of the longest in history and which may have finally begun to reverse. Thus, investors have a proven track record of buying shortly before each top and selling within weeks of any ultimate nadir.<br /><br /><strong><span style="color: #44dd44;">Who do you think will be right, top corporate insiders or average investors?</span></strong><br /><br />While investors have made all-time record inflows into U.S. equity funds at various periods in recent months, especially those funds which are expected to benefit the most from the "Trump trade," top corporate insiders have rarely been more aggressively selling. The ratio of insider selling to insider buying in recent months, and especially during the past few weeks, has surpassed most benchmarks going back to when insiders were first required to report their buying and selling during the Great Depression. There are all kinds of excuses being offered on the internet, such as insiders selling to take advantage of expected lower tax rates in 2017, or because they want to step up their buying of luxury goods, and naturally to help all of their children and grandchildren struggle through college, but the real reason is that they're selling because they expect prices to move lower--and in this case enormously lower. The Nasdaq has to drop by roughly half--not to reach its previous bottom, but amazingly to revisit its previous top from October 31, 2007. Throughout its history, no basket of small-cap stocks has ever had a price-earnings ratio above 30 prior to the final weeks of 2016, but currently the median P/E ratio in the Russell 2000 is near 31. Here is another analyst's computation of how recent valuations were even more extreme than they had been at previous all-time tops:<br /><br /><li><a href="https://realinvestmentadvice.com/second-to-none-a-look-at-valuations-vs-fundamentals/" target="_blank">Second to None--a Look at Valuations Vs. Fundamentals</a></li><br /><br /><strong><span style="color: #44dd44;">Small stocks are underperforming, which also happened in 1929, 1973, and 2007 prior to severe bear markets.</span></strong><br /><br />One reliable historic gauge of a transition from a bull market to a bear market can be found in the behavior of small-cap U.S. equities versus their large-cap counterparts. While the Dow Jones Industrial Average, Nasdaq, and the S&amp;P 500 have been setting numerous new all-time highs in recent months, the Russell 2000 and funds which track it including IWM have barely surpassed their December 9, 2016 highs. IWM reached 138.82 on December 9; it climbed as high as 140.86 on March 1, 2017 but is now trading near its December 9 level again. IWC, a fund of 1,359 microcap U.S. shares, topped out at 87.82 on December 20, 2016 and hasn't moved above that level since then. This is similar to the divergences which have usually occurred prior to the worst bear markets in U.S. history.<br /><br /><strong><span style="color: #44dd44;">Sentiment is unusually extreme on the bullish side toward large-cap U.S. equity indices.</span></strong><br /><br />According to Daily Sentiment Index which has been around for several decades, 92% of traders were bullish toward the S&amp;P 500 and 92% were similarly bullish toward the Nasdaq on March 1, 2017. Readings this high are rarely seen even during strong bull markets. There has also been a pattern of higher lows for VIX, which is a gauge that measures the average implied volatilities of a basket of options on the S&amp;P 500 Index. When numerous higher intraday lows for VIX occur, it means that the most knowledgeable investors are increasingly eager to hedge their portfolios even when new all-time highs are being achieved. This is in sharp contrast to the sharp overall drop in short selling, indicating that less-experienced traders are concluding that since the U.S. stock market only goes up it is a waste of money to hedge on the potential downside.<br /><br /><strong><span style="color: #44dd44;">Many alternative investments are positioned to pick up the slack in the event of a U.S. equity downtrend.</span></strong><br /><br />Bear markets for U.S. equity indices are more likely to occur if there is a set of highly liquid alternative investments where investors can put their money which they get from selling U.S. stocks. In this case, you don't have to look any farther than the U.S. Treasury market for such an alternative. The total value for all U.S. Treasuries and related assets is surprisingly close to the total value for U.S. equities and U.S. equity funds. TLT, a popular fund of long-dated U.S. Treasuries averaging 28 years to maturity, has slumped since its 143.62 top of July 8, 2016 and traded as low as 118.55 on Friday, March 3, 2017. Investors will eventually realize that it makes sense to sell especially overvalued U.S. stocks to purchase TLT and other U.S. Treasury funds. Other than U.S. Treasuries, many energy funds and precious metals producers have rebounded smartly from their multi-decade bottoms on January 20, 2016, but still are sufficiently undervalued historically to present worthwhile and more volatile opportunities with substantial potential upside based upon their previous peaks from years including 2014 for energy and 2011 for mining. Emerging-market bonds are a lesser-known alternative which are below their historic average valuations due primarily to overoptimism over the likelihood of a higher U.S. dollar.<br /><br /><strong><span style="color: #44dd44;">The greenback remains incredibly popular even though it has barely gained in the past two years and has probably begun a key downtrend.</span></strong><br /><br />On March 13, 2015, the U.S. dollar index reached 100.39. It surpassed this mark by achieving a 14-year top of 103.82 on January 3, 2017. This is indeed a higher high, but the total gain from March 2015 was about the same as for boring U.S. Treasury notes. Since then, the U.S. dollar index has touched several key lower highs including 102.95 on January 11, 2017 and perhaps an additional lower high on March 2, 2017 at 102.26. Much of the excitement over U.S. equities has been from non-U.S. residents who receive extra gains when the greenback climbs versus their home currency. If the U.S. dollar moves lower, then many non-U.S. investors will perceive total losses when measured in their own currencies and will become increasingly likely to sell their U.S. assets. The only reason the greenback has remained high for so long is a continued misunderstanding of the Fed's rate-hike cycle. Historically, rising rates are not bullish for the U.S. dollar as is clear when studying a multi-decade history of Fed activity and overlaying it with the U.S. dollar index.<br /><br /><strong><span style="color: #44dd44;">The Presidential cycle is especially strong when a Republican becomes U.S. President following a Democrat.</span></strong><br /><br />The U.S. Presidential cycle is a pattern in which the stock market tends to correlate with geopolitical developments. Looking back at the last four Republicans who took over from Democrats, the stock market moved lower in 1953 after Eisenhower took charge, again in 1969 after Nixon's election, in 1981 when Reagan became the chief, and once again in 2001 with George W. Bush at the helm. It is highly unlikely that Donald J. Trump will end this streak. In addition, it is common for the lowest point of any U.S. Presidential term to coincide relatively closely with the next midterm (non-Presidential) elections for the Senate and the House of Representatives which will occur on November 6, 2018. If a moderate decline for U.S. equity indices in 2017 becomes a full-fledged bear market in 2018 as I am expecting, then this could lead to key bear-market bottoms in late 2018 or early 2019.<br /><br /><strong><span style="color: #44dd44;">Recent discussion is almost entirely about how much higher U.S. equity indices can climb and when they will do so, rather than whether the U.S. stock market will move higher or lower.</span></strong><br /><br />Have you read lately about forecasts of when the Dow will reach 19 or 18 thousand the next time? I thought not. However, there are all kinds of predictions about when the Dow will climb to 22, 23, 24, 25, or 30 thousand. When the nature of the debate about any financial asset is only about how much higher or lower it will go and when it will occur, then almost always it does the exact opposite.<br /><br /><strong><span style="color: #44dd44;">Gold mining and silver mining shares are once again worthwhile for purchase.</span></strong><br /><br />Whenever it is timely to purchase gold mining and silver mining shares, I always know it on Seeking Alpha since there is a sudden brief wave of trolls who inform me that I have no idea what I am talking about. The last time this happened was in December 2016 when GDXJ had bottomed at 27.37. The same trolls appeared in force on a single day, which was today (March 3, 2017) primarily in the morning when GDXJ slid to an intraday low of 33.59--its most depressed point since January 4, 2017. The intraday pattern has been bullish for more than a year in which the greatest weakness for this sector occurs near the opening bell, with each selling wave followed by fresh buying from a combination of value investors and other strategic money managers. It isn't widely known that gold mining and silver mining shares have been among the biggest percentage winners from their intraday lows of January 20, 2016, with this bull market likely continuing for perhaps another year. Eventually, these shares will plummet along with the overall stock markets in most countries, but that is likely something to be concerned with a year from now rather than in the near future. Recent hype over a likely March Fed rate hike has greatly assisted in providing the most recent buying opportunities in this sector, just as it did in December 2015 and January 2016 and again in December 2016.<br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />Whenever they have appeared to be especially irrationally depressed, I have been purchasing the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with overpriced industrial shares will transition to a completely new set of investors' darlings. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 within 12 to 15 months instead of continuing to rally to new 14-year peaks as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The election of Donald J. Trump as U.S. President means "yuge" U.S. government spending and modestly lower taxes which is a combination for a massive rise in the deficit. The latest illogical pullback for most gold mining and silver mining shares, along with natural gas producers, has encouraged me to add to these sectors, while recent overvaluations for base metals producers along with overpriced industrial and financial shares combined with huge inflows and a sharp rise in insider selling has encouraged me to sell those. Thus, I have recently purchased GDXJ, FCG, and HDGE while selling COPX, BCS, RBS, EPOL, ECH, EPU, and THD. From my largest to my smallest position, I currently am long GDXJ (some new), SIL, KOL, XME, GDX, EWZ, RSX, URA, HDGE (many new), ELD (some new), GOEX, REMX, VGPMX, GXG, FCG (some new), IDX, NGE (some new), BGEIX, SEA, VNM, NORW, EWW, TUR, RSXJ, PGAL, GREK, RGLD, SLW, SAND, SILJ, FTAG, SOIL, EWI, and EPHE. I have short positions in IYR, XLU, FXG, XLI (many new), and SPHD, in that order, largest to smallest. U.K. banks in particular were huge winners, with BCS (Barclays) enjoying an enormous increase since June 27, 2016 from 6.89 to 11.61 plus some dividends as shares along the way. This highlights the advantage of buying most aggressively into the most severe panic selloffs while selling into the most intense excitement.<br /><br /><strong><span style="color: #44dd44;">Those who respect the past won't be afraid to repeat it.</span></strong><br /><br />I expect the S&amp;P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom perhaps occurring near the end of 2018 or in early 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current eight-year U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices throughout 2016, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to usher in four or eight more years of a bull market, nearly all of those gains have likely already occurred. Following the election of Narendra Modi in India on May 16, 2014, many analysts expected a bull market to continue for a full decade. The fund SCIF of a hundred small-cap Indian equities actually peaked on June 9, 2014 which was 24 days later; it has made a series of lower highs since then. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&amp;P 500 by roughly 3:2 from the nadir in early March 2009 through early March 2014, with IWC--a fund of even smaller U.S. companies--also significantly outperforming the S&amp;P 500 in percentage terms. Since then, both IWM and IWC have struggled, with IWM barely surpassing its December 9, 2016 intraday high of 138.82 while IWC still hasn't moved above its December 20, 2016 all-time top of 87.82. Small-cap shares similarly underperformed at numerous past stock-market zeniths prior to severe bear markets including September 1929, January 1973, and October 2007. There is also a little-known megaphone formation in which the S&amp;P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&amp;P 500 approaching or sliding below its March 6, 2009 nadir of 666.79.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-76608861608008576252016-12-21T17:39:00.002-08:002016-12-21T17:39:42.343-08:00“Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen. ” --Seth Klarman<a href="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>DOLLAR SHMOLLAR (December 21, 2016): </b>Whenever anything is repeated frequently enough, most people will end up believing it even if it is a preposterous concept. In early 2009, investors were bombarded with "experts" telling them why the U.S. economy and stock market would remain depressed for many more years because we had never experienced a subprime mortgage collapse before. Instead, we enjoyed one of the most powerful short-term rebounds in history and subsequent huge gains for U.S. equity indices. In 2011, analysts kept insisting that inflation would keep rising, commodities would soar, and emerging-market shares would remain the biggest percentage winners; all of those were the opposite of what actually happened between April 2011 and January 20, 2016. Recently, it's all about how the U.S. dollar is allegedly going to keep setting historic peaks and gaining against nearly all other world currencies. However, this is just as misguided as the other examples. The U.S. dollar has likely already begun a vital bear market.<br /><br /><strong><span style="color: #44dd44;">Tiny gains are trumpeted as allegedly being huge historic events.</span></strong><br /><br />If you scan media headlines about the U.S. dollar, they emphasize how the U.S. dollar index has reached a new 14-year high, how the greenback hasn't been so elevated against most global currencies since December 2002, and why these increases will continue for many more years. While the first two statements are both technically true, they are misleading, while the inevitable conclusion of a perpetually-rising U.S. dollar is the opposite of what is going to happen during the next two or three years. First, let's look at the claim that the U.S. dollar is at a 14-year high. Against most currencies, this is correct; however, the total increase during the past couple of years has been tiny. On March 13, 2015, the U.S. dollar index achieved a peak of 100.39 which was slightly surpassed near the end of last year when it reached 100.51 on December 2, 2015. The recent top for the U.S. dollar index was 103.65 at 7:40 a.m. on Tuesday, December 20, 2016. If you do the math you can see that this is an increase of less than 3.25% over a period of more than 21 months, or about the same total gain as a U.S. Treasury note. If you look at currencies of commodity-producing countries including Australia, Canada, Brazil, and Russia, then they have not fallen to multi-decade lows but have been forming several higher lows from their bottoms which had mostly occurred in January 2016. Recent currency losses have mostly been confined to developed-market currencies such as the Japanese yen, the Swiss franc, the euro, and the British pound. As a result, the last four have all become incredibly disliked by investors while just about all speculators have been crowding into the U.S. dollar.<br /><br />Thus, while frequent media stories about "new 14-year highs for the U.S. dollar" are technically accurate, they create the illusion among most investors that these have gained 30%-40% in recent years rather than just 3%-4%, while a modest pullback would wipe out all of the gains since March 2015.<br /><br /><strong><span style="color: #44dd44;">Quantitative evidence supports the concept of a wildly overvalued U.S. dollar.</span></strong><br /><br />On Thursday, December 15, 2016, 96% of professional futures traders surveyed by Daily Sentiment Index, which has been conducting such surveys for decades, were bullish toward the U.S. dollar index. On the same day, only 4% of such traders were bullish on gold and only 6% were bullish on silver. There were 7% bulls toward the Japanese yen and the euro and only 9% who were bullish on the Swiss franc. Interestingly, there were only 9% bulls on U.S. Treasury bonds (10-30 years to maturity) and 8% bulls on U.S. Treasury notes (2-10 years to maturity), indicating that oversold and widely-detested bonds are likely to rebound during the next several months along with a retreat for the U.S. dollar. Even non-financial web sites have been hyping the strength in the greenback, assuming that it will continue indefinitely. Travel channels on cable TV are telling you why U.S. residents should go overseas during the next few years to capitalize upon the strong U.S. dollar, while programs about cooking and leisure will frequently make comments such as "due to a continued climb for the U.S. dollar, such-and-such will likely become even more affordable." When non-financial commentators start taking a rising U.S. dollar for granted, you know that its rally has become very mature and is likely set for a major reversal of fortune.<br /><br /><strong><span style="color: #44dd44;">If the U.S. dollar is really going to plummet instead of surging, then your investment allocations will have to be entirely different.</span></strong><br /><br />Weakness for the greenback will mean that recent all-time record inflows into U.S. industrial-related and other highly popular equities are likely to be badly misguided. A drop for the greenback will likely also help to ease pressure on interest rates, thereby causing yields to decline and prices to rebound for most bonds including U.S. Treasuries, emerging-market government bonds, and corporate bonds of companies which will be helped by a weaker greenback. Instead of betting on a stronger U.S. dollar and higher U.S. interest rates, investors should be doing the opposite.<br /><br /><strong><span style="color: #44dd44;">Gold mining and silver mining shares have been among the biggest winners of all sectors in 2016, and will likely achieve even greater percentage gains in 2017.</span></strong><br /><br />Gold mining and silver mining shares in particular have been hard hit by expectations of continued gains for the U.S. dollar. After having collapsed by 80%-90% from their April 2011 tops to their multi-decade bottoms of January 20, 2016, gold mining and silver mining shares and their funds including GDXJ and SIL generally more than tripled by August 11 or 12 before thereafter suffering significant downside corrections. While they remain far above their January nadirs, they once again represent compelling values and are likely to more than triple again during the next year or so. In addition to GDXJ and SIL, funds in this sector include the relatively speculative SILJ, SLVP, SGDJ, and GOEX, along with somewhat less volatile large-cap alternatives including GDX, RING, SGDM, and PSAU. Even if a fund like GDXJ tripled in value from its current price, it would still be only about half its historic top from April 2011.<br /><br /><strong><span style="color: #44dd44;">Emerging-market bond funds are strongly out of favor, pay high yields, are not nearly as volatile as equity funds, and have been making higher lows since January 20, 2016.</span></strong><br /><br />Emerging-market bond funds including ELD, LEMB, PCY, and EMLC are barely known by most investors. At least with funds like GDXJ and GDX there are huge daily volumes even if most investors swing emotionally from loving to hating them based upon their recent performance. With emerging-market bond funds, hardly anyone knows of their existence. Their yields are usually in the 6%-7% range on average, while prices have been forming several higher lows since January 20, 2016 as is characteristic of a meaningful bull market. Each of the above funds has the additional advantage of being commission-free with one or more major U.S. brokers. The strong U.S. dollar has discouraged investors from participating in emerging-market securities of all kinds, even though a weak Brazilian real means lower wages in U.S. dollar terms for Brazilian workers and thus higher profit margins--thereby explaining why Brazilian equities have been among the biggest winners of all exchange-traded funds (not just emerging markets) in 2016 with Russian equities similarly enjoying outsized gains. As a group, emerging-market equities are roughly 30% underpriced relative to U.S. equities, thereby providing an additional motive for value investors to accumulate them into weakness. As investors progressively move out of overpriced U.S. equities into emerging-market stocks and bonds, emerging-market government bonds are an excellent and less volatile way of participating in this transition.<br /><br /><strong><span style="color: #44dd44;">Several emerging-market equity funds are once again worthwhile for purchase at higher lows.</span></strong><br /><br />For those who are willing to accept greater risks, many emerging-market equity bourses have become compelling bargains. Most prices are above their multi-decade bottoms of January 20, 2016, but EWW (Mexico) has become especially cheap due to overblown fears about Trump's frequent negative public comments about that country. A depreciated Mexican peso means that Mexican companies are paying wages in much lower U.S. dollars, thereby leading to wider profit margins which will soon be evident in rising corporate earnings. TUR (Turkey) with numerous political scandals and VNM (Vietnam) primarily out of unpopularity have also become worthwhile bargains for purchase. Whenever there is geopolitical upheaval or some kind of scandal in any emerging market, its stocks will often plummet even though such events rarely have any impact on corporate profit growth. A good rule is to buy on fear and uncertainty and to sell into excitement. Track the fund flows: huge inflows tend to precede market tops and lead to declines, while record outflows usually occur prior to major bull markets.<br /><br /><strong><span style="color: #44dd44;">The most popular sectors since Trump's election are not ideal for purchase, including most base metal producers and steel manufacturers.</span></strong><br /><br />Following the election of Donald J. Trump as U.S. President, some commodity-related assets have surged including funds of base-metal producers like COPX (copper mining) and SLX (steel manufacturers). Therefore, I have stopped buying these, although I haven't sold them because they remain generally undervalued on a long-term basis. In general, it makes sense to purchase whichever assets are currently the least popular, which have the heaviest insider buying, which have suffered recent historic outflows, which are wildly unpopular in the media, and which have especially bearish sentiment. If you only buy such securities, while selling whatever has become trendiest with the heaviest inflows, the most positive media coverage, and the most intense insider selling, then your portfolio will perform impressively in the long run.<br /><br /><strong><span style="color: #44dd44;">Investors become irrationally obsessed with myths like interest-rate differentials.</span></strong><br /><br />Two years ago, the highest interest rates in the world were almost entirely in emerging-market countries including Russia and Brazil. If investors had purchased those currencies with the highest interest rates, then those would have been among the worst currency performers in 2015. I am not sure why the myth persists about investors seeking out the highest yields when making currency trading decisions, but it has no basis in the historical record. U.S. interest rates are currently above those in most developed countries, which is used by many analysts and brokerages as an excuse for anticipating a higher U.S. dollar. However, following their recommendations would be a major error. The most successful currency investors look at relative valuation which has no correlation with interest rates. I will now explain a simple method of computing such relative valuation.<br /><br /><strong><span style="color: #44dd44;">The Big Mac tells the truth.</span></strong><br /><br />One well-known but little-used indicator to determine which global currencies are too high or too low is the Big Mac indicator. This was discovered by some clever person several decades ago. A Big Mac contains almost identical ingredients no matter where in the world it is made or consumed. If the price of a Big Mac sandwich at a number of McDonald's restaurants in any given country is significantly higher or lower than it is somewhere else, then it usually indicates that the country with the higher price has an overvalued currency while the cheapest Big Mac sandwiches can be found in the countries with the most underpriced currencies. Today, you can get good bargains on a Big Mac in countries including Japan, the U.K., most of the EU, and Switzerland. This is not usually the case. Among the highest Big Mac prices are those in the United States, which is also not typically true. In 2011, a Big Mac was unusually costly in cities including Sao Paulo and Moscow, which contradicted most analysts' expectations of continued gains for overpriced emerging-market currencies and led to some of the biggest losses for these currencies in their entire histories between April 2011 and January 2016. Today's Big Mac message is that the U.S. dollar will retreat while the currencies of nearly all developed markets will rebound.<br /><br /><strong><span style="color: #44dd44;">How long will these reversals persist?</span></strong><br /><br />Since January 20, 2016, most funds of commodity producers and emerging-market equities have been among the top-performing winners from their respective 52-week lows out of all exchange-traded funds. This pattern will likely continue in 2017, but it won't persist forever. Eventually, heavy insider buying of these securities will become transformed into substantial insider selling, just as has occurred recently with twice the usual ratio of insider selling to insider buying for overall U.S. equities. The media will change their tune and will invent a new series of meaningless myths--just as they did in the first half of both 2008 and 2011--which everyone will believe about commodities and emerging markets continuing to climb forever. This will encourage all-time record inflows into most funds of commodity producers and emerging-market securities. Such a dramatic transformation probably can't happen soon, but it could occur by the first half of 2018.<br /><br /><strong><span style="color: #44dd44;">Aging bulls lead to fewer and fewer stocks remaining in bull markets.</span></strong><br /><br />One consistent pattern is that as U.S. equity indices try to extend their longest-ever bull markets, fewer and fewer stocks will continue to climb while others gradually begin bear markets. Whenever such a transition occurs from a major bull market to a major bear market for U.S. equity indices, most investors are reluctant to embrace a bearish thesis. Instead, they will crowd more and more frenetically into whichever sectors and shares are the biggest percentage winners. So far, hardly anyone has been pouring into most of the top gainers of 2016, but this will likely happen at some point during 2017-2018. Therefore, whatever continues to climb next year will likely enjoy far more positive investor attention than usual, especially as rising shares face less and less competition. This kind of narrowing reached its all-time extreme in January 1973 when only about 75 shares (known popularly as the "Nifty Fifty") were continuing to climb while thousands of U.S. equities had already begun major bear markets. Eventually, from January 1973 through December 1974, we experienced the most crushing bear market since the Great Depression with the Nifty Fifty stocks being among the greatest percentage losers.<br /><br />It is likely that before we enter the next global recession we will have a final surge for whichever assets are continuing to set new 52-week highs several months or a year from now, and perhaps also into the early months of 2018. At that time it will probably be essential to sell all risk assets, because a very undervalued and pummeled U.S. dollar in 2018 could be setting the stage for its next powerful bull market. Just when everyone will have concluded that the greenback will keep slumping, it will probably enjoy even greater gains than it has achieved in the current cycle.<br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />Whenever they have appeared to be especially irrationally depressed, I have been purchasing the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years and the brief post-election love affair with overpriced industrial shares will transition to a completely new set of investors' darlings. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 within 1-1/2 years instead of continuing to rally to new 14-year peaks as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The election of Donald J. Trump as U.S. President means "yuge" U.S. government spending and modestly lower taxes which is a combination for a massive rise in the deficit. The latest illogical pullback for most gold mining and silver mining shares, along with undervalued emerging-market bonds, has created some compelling buying opportunities, so be sure to seize them before they disappear. From my largest to my smallest position, I currently am long GDXJ (many new), SIL (some new), KOL, GDX (some new), XME, COPX, EWZ, RSX, GOEX, URA, REMX, VGPMX, ELD (some new), HDGE (some new), GXG, IDX, NGE, BGEIX, ECH, FCG, SEA, VNM (some new), NORW, BCS, EWW (some new), PGAL, GREK, EPOL, RBS, TUR (some new), RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG, SOIL, EWI, EPHE, and THD. I have short positions in IYR, XLU, FXG, and SPHD, in that order, largest to smallest. I recently sold DXJ because I believe the uptrend for Japanese equities and the downtrend for the Japanese yen have both been overdone.<br /><br />I expect the S&amp;P 500 to eventually lose two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottom perhaps occurring near the end of 2018 or in early 2019. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until it is nearly over--just as most investors in August 2008 didn't realize that we were well into the crushing 2007-2009 bear market. The current U.S. equity index bull market is already the longest on record; expecting several more years of gains is like anticipating that a 100-year-old marathon runner will continue to run marathons for a few more decades. While the media have been quick to trumpet new all-time highs for many U.S. equity indices throughout 2016, almost no one has noticed that fewer and fewer individual shares have set new 52-week highs especially as compared with previous peaks including June 2015, and with generally reduced overall participation. While many investors expect the surge following the election of Donald J. Trump as U.S. President to usher in four or eight more years of a bull market, nearly all of those gains have likely already occurred. Following the election of Narendra Modi in India on May 16, 2014, many analysts expected a bull market to continue for a full decade. The fund SCIF of a hundred small-cap Indian equities actually peaked on June 9, 2014 which was 24 days later; it has made a series of lower highs since then. IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&amp;P 500 by roughly 3:2 from the nadir in March 2009 through March 2014, but thereafter has gained less than the S&amp;P 500 and many other large-cap indices. The most recent high for IWM occurred on December 9, 2016, making the total post-Trump rally less than 31 days. At least you can say that it lasted a week longer than India's "decade-long" bull market. There is a little-known megaphone formation in which the S&amp;P 500 has been making higher highs and lower lows since 1996, so it shouldn't be a shock to investors if the current or upcoming bear market for U.S. equity indices results in the S&amp;P 500 approaching or sliding below its March 6, 2009 nadir of 666.79.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-58228783605444498222016-11-13T12:11:00.000-08:002016-11-13T12:11:06.107-08:00“Trump is about to make inflation great again.” --Luke Kawa and Sid Verma<a href="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>TRUMP WON'T TRUMP ENTRENCHED TRENDS (November 13, 2016): </b>There has been a "yuge" amount of chatter on the internet and in the media about the alleged impact of Donald J. Trump as the next U.S. President. As with most simplistic theories, there is a kernel of truth and a pile of confusion. It is important to figure out what makes sense logically, and especially not to be overly influenced by the short-term reaction by the financial markets which will often be the opposite of what will happen over the next year or two.<br /><br /><strong><span style="color: #44dd44;">The long-term trend is your friend.</span></strong><br /><br />In the financial markets, trends which are in place tend to remain in place for years no matter what happens with news events, because these trends are based upon economic cycles which have existed for decades or centuries and are only modestly affected by whatever happens along the way. In 2016, there are two primary trends which will continue at least for several more months and probably much longer: 1) On January 20, 2016, nearly all shares of commodity producers and emerging-market securities completed bear markets which had mostly begun in April 2011 and initiated major bull markets. Because of the extended and severe nature of their previous declines, including all-time record outflows in the months prior to their final bottoms, most investors psychologically have not yet accepted the fact that these assets are in powerful uptrends. 2) In July and early August 2016, high-dividend and low-volatility shares which had been in bull markets since October 4, 2011 and had enjoyed all-time record inflows for any sector in history transitioned to major bear markets. Because these assets had become so popular in the media, and because investors embraced these investments since it gave them 3%-4% dividends which banks and mutual funds were no longer paying on money market savings accounts, investors have been reluctant to acknowledge that these have switched to severe downtrends.<br /><br /><strong><span style="color: #44dd44;">Enter Donald Trump. What has changed?</span></strong><br /><br />While the election of Donald J. Trump as U.S. President was a dramatic and unexpected event, even the most dramatic and unexpected events in the past have had little impact on the financial markets in the long run. On 9/11, the worst terrorist attack in U.S. history had occurred while U.S. equity indices were in the middle of bear markets since March 2000 which was 1-1/2 years earlier. Following 9/11, there was a one-week slump for U.S. stocks followed by a rebound into early January 2002. However, the bear market then resumed in full force until it bottomed on October 10, 2002. Similarly, gold had been in a bull market since April 1, 2001. The events of 9/11 caused a brief upward spike, then a retreat, then sideways movement into the middle of December 2001. Gold's bull market then continued in full force. Thus, even something like 9/11, after a brief interruption, merely delayed two major financial trends by a few months.<br /><br />Thus, while Donald J. Trump is likely to lead to new policies and other changes, with some expected and some surprises, the two primary trends for inflation-loving and deflation-loving assets listed above are not going to be meaningfully altered. These trends exist due to long-term cyclical behavior in the global financial markets. The trajectory of these trends will be somewhat impacted, which I will discuss in this essay. However, do not believe analyses which tell you that everything is going to be entirely different, because patterns which have been established for centuries or longer will always repeat themselves with minor variations.<br /><br /><strong><span style="color: #44dd44;">Be careful not to reach false cause-and-effect conclusions.</span></strong><br /><br />In the financial markets, if a particular news event occurs and there is a sharp market reaction afterward, then far too many investors will conclude that the event caused the reaction. Almost always there is a very different kind of behavior which is occurring. Consider how gold, which can be measured by the exchange-traded funds GLD and IAU, acted around the U.S. election. Gold has been in an uptrend with periodic corrections since December 14, 2015, two days before the U.S. Federal Reserve made their first rate hike. Gold is likely to remain in a bull market until almost exactly the time when the Fed decides to begin cutting rates again--which perhaps will be in early 2018, although it is too early to say with any accuracy. However, there was a lot of media hype about how Hillary Clinton was allegedly bearish for gold while Donald J. Trump was supposedly bullish. Therefore, gold had been retreating in price for a few months leading up to the U.S. election. It then rallied sharply on Tuesday night until around midnight when the initial surprise of a Trump victory became increasingly probable. After ascending rapidly to 1338.30 U.S. dollars per troy ounce, gold thereafter plummeted to 1218.70 at 1:35 p.m. on Friday, November 11, 2016. This is a drop of almost exactly 120 dollars which even for a volatile year like 2016 is a significant percentage loss.<br /><br /><strong><span style="color: #44dd44;">A simplistic conclusion would be that Trump is actually "bad for gold."</span></strong><br /><br />Many investors therefore revised their initial opinion of Trump to conclude that since he was elected, and gold subsequently slumped, then Trump must be bearish for gold. Since he will be around for either four or eight years, this encouraged panic selling in the assumption that this three-day trend would continue indefinitely. As a result, there have been massive outflows in recent days from funds of precious metals and the shares of their producers including GDX, GDXJ, SIL, and related assets. This is a dangerous example of what is known as outcome bias. If a particular event is followed by a particular form of behavior, then we tend to believe that the event caused the outcome. However, it is far more likely that when gold moved above 1300, there were many technical buyers who jumped in just as they did after Brexit when gold made a similar upward spike. The financial markets will always defeat any large group of participants, and did so by knocking out these new buyers with a subsequent pullback below 1300 to trigger their sell stops. When other investors saw this decline, they falsely concluded that gold was in a new bear market.<br /><br /><strong><span style="color: #44dd44;">The 200-day moving averages were broken to the downside for GDXJ, SIL, and similar securities.</span></strong><br /><br />When the 200-day moving averages were broken to the downside for many gold and silver mining shares, this encouraged additional selling by technical traders--as well as those who were disappointed that Trump's victory didn't lead to higher gold prices and sold for emotional reasons. As a result, most assets in this sector plummeted to their lowest levels since early June or late May 2016. However, the fundamental reality of being in a Fed rate hike cycle which had begun at the end of 2015 hasn't changed. All the reasons for being bullish on gold prior to Trump's election are just as true today, and more so because of the likely magnified pro-inflation slant.<br /><br /><strong><span style="color: #44dd44;">Increased government spending and lower taxes are a recipe for rising inflationary expectations.</span></strong><br /><br />The shares of all commodity producers including gold and silver mining shares are helped whenever inflation expectations are climbing most rapidly. Similarly, high-dividend shares such as utilities (XLU, VPU, FXU), REITs (VNQ, IYR, RWR), consumer staples (XLP, VDC, FXG), and low-volatility favorites (SPHD, USMV, EFAV) are harmed proportionately by such behavior, since their yields then have to compete with higher yields on other investments including complete safe bank accounts and certificates of deposit (CDs). The downtrends for high-dividend and low-volatility assets have been accelerating in recent weeks, well before Trump's election, and have continued after the election. Clearly it doesn't make sense that rising inflation would be bearish for high-dividend shares but not bullish for commodity producers.<br /><br /><strong><span style="color: #44dd44;">There are also divergences within assets which favor rising inflation.</span></strong><br /><br />There are also divergences within assets which love the prospect of rising inflation. The shares of copper producers and their funds including COPX, along with other base-metal producers, have been mostly accelerating their uptrends in November 2016. Financial shares including banks which had suffered huge negative effects from deflation have been rebounding sharply in the expectation of rising inflation and steepening yield curves. At the same time, as mentioned earlier, gold and silver mining shares have recently slumped. Since these assets have a strong positive correlation with rising inflationary expectations, those which are diverging will eventually have to get back in line with the others. It is like kids who are friends on a playground during recess; one or two might split off from the group to check out the sandbox or some interesting game, but eventually they will go back to their group of friends. Acting differently is anomalous and inconsistent with centuries of history. Birds of a feather flock together.<br /><br /><strong><span style="color: #44dd44;">If something seems to be illogical than it usually is.</span></strong><br /><br />There is a famous test, repeated in various forms, in which participants are given a list of facts and asked to reach a conclusion about what will happen next. Usually they reach the correct conclusion. In a variation, some participants are given exactly the same facts, but are given one of four possible outcomes. They are told that a particular outcome actually occurred, and then asked like the first group to give a cause-and-effect explanation. When told what the correct outcome has been, the explanations are completely altered from those of the first group to reflect the known result. What the participants don't realize is that each of four test groups is told a different final outcome. Regardless of the twisted logic required to incorporate actual events with what makes sense, people will consistently alter their explanations dramatically to fit what they believe to be the actual behavior. When investors observe what has recently been happening with asset valuations, such price changes cause most people to entirely alter their previous expectations--even when their original conclusions had been valid.<br /><br />The financial media are experts at repeatedly rewriting history to try to fit the latest facts. I have frequently seen news stories which tell you in the morning why a particular government news report was bullish for a certain asset which has since moved higher; if this asset slumps later the same day, they will unashamedly tell you why the same government report was allegedly bearish for that asset.<br /><br /><strong><span style="color: #44dd44;">If logic enables you to reach a reasonable conclusion, do not allow yourself to be swayed by recent contradictory behavior.</span></strong><br /><br />As a result, if most people observe that gold has plummeted after the election of Donald J. Trump, then it doesn't matter if they had correctly reasoned that Trump's victory would mean greater spending, lower taxes, much higher deficits, rising inflation, and thus significantly higher prices for precious metals and the shares of their producers. Investors are discarding those clearly accurate conclusions and allowing the short-term price movement to override their logical thinking.<br /><br /><strong><span style="color: #44dd44;">The same kind of false reasoning happens repeatedly in the financial markets.</span></strong><br /><br />A useful example would be when U.S. housing prices had peaked near the end of 2006 and then began to slump in 2007. Many observers in the media and on the internet correctly concluded that if housing prices were falling, especially when combined with the prevalence of subprime mortgages and other dangerous lending tactics, it would lead to a recession and much lower stock prices. However, after an initial pullback, U.S. equity indices climbed and then surged through October 2007--even as housing prices continued to retreat and mortgage defaults skyrocketed. Thus, investors concluded based upon the market behavior that there was nothing to worry about after all; the climb in the S&amp;P 500 "proved" that the stock market wouldn't be negatively affected by the housing collapse. Afterward, of course, we experienced the most crushing bear market since the Great Depression. Investors' and analysts' original conclusions about the negative effect of the housing bubble were accurate, but the market's interim rally caused almost all of them to foolishly change their minds.<br /><br /><strong><span style="color: #44dd44;">The U.S. dollar index is a useful and much-maligned barometer.</span></strong><br /><br />In 2015, the U.S. dollar index completed a March peak at 100.39 and a slightly higher December 2, 2015 top of 100.51 which had marked its highest point in 12-2/3 years. Throughout 2016, most people think that the U.S. dollar index has remained in an uptrend, but it may have begun an important bear market which will eventually accelerate to the downside. In typical fashion, it has been making several last-gasp efforts to move higher, with three moves during the past month above 99. Instead of climbing to 110 or 120 as most analysts are anticipating in upcoming years, it is far more likely that the U.S. dollar index will instead retreat below 90 and will eventually trade below 80 probably within 1-1/2 years. The U.S. dollar index dropped below 80 for at least part of each year from 2007 through 2014, so this would merely be a return to its normal historic behavior.<br /><br /><strong><span style="color: #44dd44;">The bull markets for mining and energy shares have been in place since January 20, 2016, and will eventually accelerate.</span></strong><br /><br />The bear markets for high-dividend shares since July 2016 and the bull markets for commodity producers and emerging-market securities since January 20, 2016 will remain intact at least through much of 2017 and perhaps considerably longer. These trends are an inevitable result of the end of the deflationary monetary stimulus cycle and the beginning of the inflationary fiscal stimulus cycle. With the end of gridlock, higher government spending, and lower taxes, these trends won't be fundamentally changed but they will likely become more intense and could perhaps last longer than they would have with a Hillary Clinton victory. Whatever is diverging in the short run from this pattern is therefore providing a trading opportunity. Whichever deflation-anticipating assets are rallying should be sold or sold short, while whichever inflation-anticipating assets including gold and silver mining shares which have been irrationally retreating should be purchased. The only reason investors aren't doing so is because recent market behavior seems to "prove" the opposite, which will end up being a false signal just like the rally for the S&amp;P 500 in 2007.<br /><br /><strong><span style="color: #44dd44;">Mexican equities and their funds including EWW make excellent investments for classic contrarian reasons.</span></strong><br /><br />Think back one year ago to when the Brazilian real and the Russian ruble were collapsing. Investors concluded that their weak currencies and political uncertainty would lead to lower equity prices. However, a weak currency led to increased exports and much lower wages when measured in U.S. dollar terms, while they were selling the same goods in U.S. dollars in world markets. Thus, their profit margins soared and, after an initial slump, Brazilian and Russian stocks have been the top two emerging markets in 2016. Following Brexit, the British stock market similarly plummeted on June 27, 2016 out of fears that a lower British pound would lead to a long-term economic slowdown in that country. Instead, the cheap British pound has led to British stocks being among the top-performing global bourses since then.<br /><br /><strong><span style="color: #44dd44;">While Donald J. Trump is seen as allegedly negative for Mexico, that country is likely to be among the biggest beneficiaries of increased U.S. government spending and lower taxes.</span></strong><br /><br />The identical pattern can be seen in the recently plunging Mexican peso and a dramatic loss for Mexican equities and their funds including EWW. Far from being negative, the undervalued Mexican peso is making wages lower in U.S. dollars while increasing the total amount of exports given currency competitiveness. This will lead to much higher profit margins and Mexican stocks being among the top-performing emerging markets during the upcoming year. It is the exact same pattern as the above examples, and as with nearly all similar circumstances going back decades or longer.<br /><br />I first noticed this common pattern as a much younger investor when Pinochet gave way to a Democratic government in Chile. The two listed Chilean securities on the NYSE, a telephone company and a closed-end equity fund, both plummeted to multi-year lows on the exact date of the transition out of fear and uncertainty about the future. The Chilean stock market was thereafter among the world's biggest winners over the subsequent five- and ten-year period.<br /><br /><strong><span style="color: #44dd44;">Bridge players make the best traders, because they understand the difference between method and results.</span></strong><br /><br />Some investment firms only hire competitive bridge players (i.e., the card game), and there is a good reason for this. I have played bridge at a high competitive level, and the top players who are far better than me consistently make decisions based upon the probability of success. Thus, while a beginning bridge player is likely to frequently take a finesse--an easily-learned play which has a 50% chance of victory--a more experienced player will use end plays, squeezes, and other complex strategies which in combination will have an 80%-90% chance of prevailing. Being a card game with some element of luck, the most experienced players can tell you a day's worth of tales about tournaments where the inferior play actually succeeded. However, expert bridge players won't alter their strategies based upon periodic unfortunate results. They know that they won't always win, but they also know that if they make consistently logical and superior decisions then they will come out far ahead in the long run. Emotional investing methods or chasing after technical trends will sometimes work, but sticking with rational conclusions regardless of what the market does in the short run is almost always a superior method which will produce far greater profits over any period of decades.<br /><br /><strong><span style="color: #44dd44;">Assets in bull markets which slide below their 200-day moving averages almost always represent ideal buying opportunities.</span></strong><br /><br />The S&amp;P 500 was in a bull market starting on March 6, 2009, and may still be in a bull market or may have transitioned to the early stages of a bear market. When was the best time to buy it, other than obviously at the exact bottom? It has been whenever the S&amp;P 500 slumped below its 200-day simple moving average. In the beginning of October 2011, the S&amp;P 500 made a brief plunge below that mark, and it was one of the most rewarding purchase points of the entire cycle. If you review the 35-year bull market for long-dated U.S. Treasuries, as measured by funds including VUSTX and TLT, these were also exceptionally good buys whenever they have dropped below their 200-day moving averages. Thus, funds like GDXJ and SIL, which even after their recent slumps remain among the top winners from their respective 52-week lows, are providing superior buying opportunities now that they have fallen below their respective 200-day moving averages. The selling by technical-minded traders and many disappointed investors when those levels were broken to the downside are providing even better discounts than would otherwise have been available.<br /><br /><strong><span style="color: #44dd44;">Avoid succumbing to the outcome bias.</span></strong><br /><br />Do not allow yourself to be easily seduced into believing that assets which have made sharp moves following Trump's election are sending some kind of messages or indicating the "true" outcome--and especially be wary of concluding that the market behavior of the past few days will continue into the next several years. Following President Obama's initial election in November 2008, the shares of commodity producers slumped through November 20, 2008 and thereafter began powerful bull markets which persisted until April 2011. After Obama's re-election in November 2012, the S&amp;P 500 and other U.S. equity indices slid for nearly two weeks and thereafter climbed strongly. The initial reaction can be either the "right" or the "wrong" one--or, more often, simply people chasing after what others have been doing in the frantic belief that doing something is better than doing nothing.<br /><br />Trends which are intact will remain intact no matter what happens, because they are determined by events and cycles which unfold over periods of years or decades. The election of Donald J. Trump will eventually intensify and perhaps extend some of these trends, but don't expect any major changes in direction. Maintain your focus and gradually buy more of whatever has become irrationally undervalued while progressively selling whatever has become most overpriced.<br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />Whenever they have appeared to be irrationally depressed, I have been buying the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities have finally begun major bear markets from ridiculous overvaluations and all-time record inflows, these irrational favorites of recent years will transition to a completely new set of investors' darlings. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 within 1-1/2 years instead of climbing above 100 as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The election of Donald J. Trump as U.S. President means "yuge" U.S. government spending and modestly lower taxes, which is a combination for a massive increase in the deficit along with higher inflation and interest rates. The latest irrational pullback for many commodity producers has created some compelling buying opportunities, so be sure to seize them before they disappear. From my largest to my smallest position, I currently am long GDXJ (many new), SIL (some new), KOL, GDX (some new), XME, COPX, EWZ, RSX, GOEX, URA, REMX, VGPMX, HDGE, ELD, GXG (some new), IDX, NGE, BGEIX, ECH, FCG, SEA (some new), VNM (some new), NORW, DXJ, BCS, EWW (many new), PGAL, GREK, EPOL, RBS, TUR, RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG, SOIL, EPHE, and THD. I have short positions in IYR, XLU, FXG, and SPHD, in that order, largest to smallest.<br /><br />I expect the S&amp;P 500 to eventually lose two thirds of its August 23, 2016 intraday top of 2193.81, with its next bear-market bottom perhaps occurring near the end of 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then. While the media have been quick to trumpet new all-time highs for many U.S. equity indices throughout 2016, almost no one has noticed that several broad-based sectors have failed to surpass their peaks of June 2015 including IWC, a fund of 1,377 micro-cap U.S. companies (i.e., with total market capitalizations which are less than 300 million U.S. dollars). IWM, a fund of the two thousand companies in the Russell 2000, had been outperforming the S&amp;P 500 by roughly 3:2 from the nadir in March 2009 through March 2014, but has since been generally underperforming and has barely surpassed its June 2015 peak. The failure of small-cap indices to outpace their large-cap counterparts as a group has frequently signaled major bear markets in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing had created valuations in July 2016 at roughly double fair value for most consumer staples, real estate investment trusts, utilities, and low-volatility shares, all of which have been underperforming most other sectors since then and will eventually lose 60% or more of their peak valuations.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-42375617934491101152016-11-07T08:01:00.004-08:002016-11-07T08:01:43.473-08:00“There can be few fields of human endeavor in which history counts for so little as in the world of finance.” --John Kenneth Galbraith<a href="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>COMMODITY-PRODUCERS' RALLIES DON'T GET NO RESPECT (November 7, 2016):</b> If you sort all unleveraged exchange-traded funds based upon their percentage increases from their respective 52-week lows, then you will discover that the top 50 are all involved with commodity production or emerging markets. The top three funds consist of silver mining companies (SILJ, SLVP, SIL), followed by coal mining (KOL), then junior gold mining (GDXJ, GOEX, SGDJ), then general metals mining (XME), steel (SLX), gold mining (RING), Brazil and Russia (EWZS, EWZ, RSXJ, BRF), large-cap gold mining (GDX, SGDM), copper mining (COPX), Brazil again (BRAQ), gold mining again (PSAU), more Brazil (FBZ, BRAZ), Peru (EPU), base metals mining (PICK), Canadian commodity production (CNDA), and then a mix of commodity producers, master limited partnerships, and emerging-market equities including ILF, FCG, GML, PSCE, XOP, and ENY. However, most of these funds have continued to experience outflows whenever they are experiencing short-term corrections. Partly this is because they had been in bear markets from April 2011 through January 20, 2016, so most investors don't trust their 2016 rebounds. Partly it is because they remain highly volatile, so that after they surge for some period of time they will slump by 20% or 30% and discourage participants into believing that they are incapable of sustaining bull markets. Even those funds which have more than doubled from their January 20 nadirs have mostly suffered from periodic outflows and are almost never recommended in the mainstream financial media.<br /><br /><strong><span style="color: #44dd44;">The longer that investors ignore the best-performing funds of 2016, the more extended their uptrends will become.</span></strong><br /><br />From September 2008 through December 2012, nearly all U.S. equity index funds based upon the S&amp;P 500 or some other benchmark equity index continued to suffer more outflows than inflows. This was partly because many investors had lost more than half their money in these funds during the crushing 2007-2009 bear market, and partly because these securities remained highly volatile even after they had begun bull markets in early March 2009. The strongest percentage increases usually occur when investors don't trust recent gains and are unwilling to participate. So far, there are no clever acronyms for commodity producers, and the only well-known acronym for emerging markets is BRICs which have been out of favor for 5-1/2 years.<br /><br /><strong><span style="color: #44dd44;">High-dividend shares have been in bear markets since July 2016.</span></strong><br /><br />In sharp contrast to the choppy fund flows for commodity producers and emerging-market securities, high-dividend and low-volatility funds had enjoyed all-time record inflows in recent years. These including IYR, XLU, FXG, and SPHD had become so popular that their total inflows in many cases had sent new all-time records for all sectors, even surpassing the huge inflows into technology shares in 1999-2000. Partly this is because normally conservative investors who for decades would put their money into bank accounts to get 3% or 4% couldn't accept getting only 1% or less from such time deposits, and decided to do the same as everyone else and pile into funds paying similar yields as dividends. These incredibly trendy funds have been underperforming since July 2016, experiencing mostly double-digit percentage declines. However, investors haven't yet figure out what to do with their money; they haven't made notable inflows into any major asset class during the second half of 2016. Selling has begat selling; even ordinary U.S. equity index funds have mostly experienced outflows in recent months. Investors are taking their money out of most stocks and bonds, but so far they haven't decided what to do with it. The money is mostly sitting in cash, waiting for a particular concept to become popular.<br /><br /><strong><span style="color: #44dd44;">We have the ingredients for a perfect storm: plenty of buying power among investors, no conviction about what to do with it, and a compelling list of 2016 winners.</span></strong><br /><br />One characteristic of any transition from a U.S. equity bull market to a bear market is that, as the months pass, fewer and fewer securities are setting new all-time or 52-week highs. This process of the narrowing of the equity base has been underway for almost 1-1/2 years. The Russell 2000, which can be measured by IWM, has never surpassed its June 2015 top even as the S&amp;P 500 and most other well-known U.S. benchmark indices did so repeatedly during the first several months of 2016. This is how bear markets classically have always begun. Investors will ultimately gravitate toward the biggest winners, which in this case are nearly all commodity producers and emerging markets. With so much money sitting around looking for a home, sooner or later those investors who tend to act first will notice what is going on and act accordingly, with everyone else eventually climbing aboard the bandwagon. Many investors won't realize which funds are 2016's top performers until they see the lists of such funds when they become widely publicized around the beginning of 2017.<br /><br /><strong><span style="color: #44dd44;">Both mining and energy producers have experienced multi-month corrections and are likely resuming their powerful uptrends.</span></strong><br /><br />Most shares of gold and silver mining companies had peaked on August 11 or 12, 2016 and slumped for several weeks, bottoming on or around October 6, 2016. GDXJ slid from 52.50 to 36.96 over this time period, which is a total loss of 29.6%. Such a steep pullback discouraged many recent buyers from remaining committed to these and related assets. Energy shares including URA, FCG, KOL, OIH, and TAN also suffered corrections, with the price of the December 2016 crude oil futures contract falling to 43.57 U.S. dollars per troy ounce on Friday, November 4, 2016 which was its lowest point since June 11, 2016. Between now and the end of 2016, the shares of commodity producers will likely improve both their relative and absolute positioning even further, so they end up as almost exclusively the biggest winners of the year when people are deciding how to make allocations for 2017. Emotionally, many people like to use the new calendar year as an impetus to changing their asset allocation and revamping their portfolios. This will probably result in even more money being withdrawn from retreating high-dividend and low-volatility shares, with some of it going into commodity producers and emerging-market stocks and bonds.<br /><br /><strong><span style="color: #44dd44;">The greenback seems to have completed additional lower highs as it has been doing for nearly one year.</span></strong><br /><br />If you mention the U.S. dollar to most people, they will tell you that it is in an uptrend. As measured by the U.S. dollar index, a 12-2/3-year top of 100.51 was reached on December 2, 2015 and has been followed by a pattern of several lower highs. Two additional lower highs were just completed, with the U.S. dollar index touching 99.119 at 10:15 a.m. on October 25, 2016 and then another lower high of 99.026 at 12:40 p.m. on October 27, 2016. Since then, the greenback has continued its choppy descent, which will lead to additional lower highs and eventually a downside acceleration. Instead of climbing above 100 as most are anticipating, is much more likely that the U.S. dollar index will plummet below 80 within 1-1/2 years or less. While this probably sounds like an irrationally aggressive projection, the U.S. dollar index was below 80 at least part of each year from 2007 through 2014. As emerging markets went out of favor worldwide during 2011-2015, many currency traders crowded irrationally into the U.S. dollar, but that is unsustainable as emerging markets have been experiencing higher GDP growth rates along with stronger stock and bond gains than their U.S. counterparts for most of 2016. This pattern is likely to continue into 2017 and perhaps into early 2018, thereby encouraging investors to move progressively away from the safe haven of the greenback.<br /><br />This will serve as a supportive factor for assets which correlate inversely with the U.S. dollar, including most shares of commodity producers and emerging-market securities.<br /><br /><strong><span style="color: #44dd44;">There has been far too much media hype about how assets will allegedly "respond to" the U.S. Presidential election.</span></strong><br /><br />There is usually a brief, intense emotional reaction to any widely-broadcast news, and that will likely also be the case with Tuesday's November 8, 2016 U.S. elections for President, the Senate, and the House of Representatives. However, even the extreme post-Brexit excesses were mostly resolved relatively quickly, while any alleged post-election response has already been mostly factored into current asset valuations. If there is any activity which goes in the opposite direction of their established trends, such as unusual lows for commodity producers or strong rebounds for high-dividend shares, then these should be used as opportunities to buy whichever commodity producers become most oversold and to sell short whichever high-dividend assets bounce the most euphorically. In general, the more that any news event is believed to exert a "permanent" influence on asset valuations, the more likely that trends which were in place prior to these events will resume shortly thereafter. The strong bull markets for commodity producers and emerging markets which began on January 20, 2016 will probably continue for another year or more in spite of periodic sharp corrections, while the bear markets for high-dividend and low-volatility shares which mostly began in July 2016 will continue perhaps into 2019 with occasional upward bounces.<br /><br />There was a fascinating academic study published recently about why most people make inferior investing decisions:<br /><br /><li><a href="http://www.economist.com/blogs/buttonwood/2016/11/investing?cid1=cust/ddnew/n/n/n/2016111n/owned/n/n/nwl/n/n/n/8010412/email&amp;etear=dailydispatch" target="_blank">Irrational Tossers</a></li><br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />Whenever they have appeared to be irrationally depressed, I have been buying the shares of funds which invest either in the shares of commodity producers or emerging-market stocks and bonds, since I believe these remain the two most undervalued sectors in that order. In a world where real estate and U.S. high-dividend securities are wildly overvalued, these irrational favorites will accelerate their bear markets which aren't even recognized by most investors. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 instead of climbing above 100 as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The latest multi-month pullback for many commodity producers has created some compelling buying opportunities, so be sure to seize them before they disappear. I was a very heavy buyer on June 27, 2016 when I made my largest total purchases since October 4, 2011 to capitalize upon the ridiculous post-Brexit panic. From my largest to my smallest position, I currently am long GDXJ (some new including today at 39.99), SIL (some new), KOL, GDX (some new), XME (some new), COPX (some new), EWZ, RSX, GOEX, URA (many new), REMX, VGPMX, HDGE, ELD, GXG (some new), IDX, NGE, BGEIX, ECH, FCG (some new), SEA (some new), VNM (some new), NORW, DXJ, BCS, PGAL, GREK, EPOL, EWW, RBS, TUR, RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG, SOIL, EPHE, and THD. I have short positions in IYR, XLU, FXG, and SPHD, in that order, largest to smallest.<br /><br />I expect the S&amp;P 500 to eventually lose two thirds of its August 23, 2016 intraday top of 2193.81, with its next bear-market bottom perhaps occurring near the end of 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then. While the media have been quick to trumpet new all-time highs for the Dow Jones Industrial Average, the Nasdaq, and the S&amp;P 500 Index, hardly anyone has pointed out that the Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. The top for the Russell 2000 had occurred in June 2015 and so far has not been surpassed in this cycle. The failure of small-cap indices to reach new all-time highs as a group has frequently signaled major bear markets in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing had created valuations in July 2016 at roughly double fair value for most consumer staples, real estate investment trusts, utilities, and low-volatility shares, all of which have been underperforming most other sectors since then and will eventually lose 60% or more of their peak valuations.<br /><br /><span style="color: orange;"><b>Thoughts or concerns about your investments in the light of the election? Feel free to email sjkaplan@truecontrarian.com&nbsp;</b></span>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-56307408611038467262016-09-11T18:42:00.002-07:002016-09-11T18:42:57.540-07:00“If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.” --Benjamin Graham<a href="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>STEP RIGHT UP TO THE THREE-RING CIRCUS (September 11, 2016): </b>The global financial markets in 2016 have become a three-ring circus. The most popular sideshow by far has been high-dividend and low-volatility shares which had enjoyed all-time record inflows and overvaluations earlier this summer, and have since become the worst-performing sectors of the past several weeks. On the opposite side of the ring are commodity producers and emerging markets, which everyone hated at the start of the year and have been by far the biggest winners in powerful bull markets. Finally, ladies and gentlemen, in the center ring we have the U.S. dollar itself, beloved by everyone and believed to be rising, but which has actually been in an important bear market since December 2, 2015.<br /><br /><strong><span style="color: #44dd44;">As is true for every bubble throughout history, high-dividend and low-volatility sectors have begun what will become crushing bear markets.</span></strong><br /><br />Whenever I argued in late 1999 and early 2000 that internet shares would become huge losers, as I often did, people were convinced that I had some serious mental instabilities. Today, if you tell someone that they are taking dangerous risks by purchasing high-dividend or low-volatility shares, most will insist that these shares have consistently behaved more steadily than the broader equity market for decades, and they have no choice anyway because they need income to pay their expenses. The inflows into these sectors during the past year are astonishing, far outpacing nearly all other all-time record one-year inflows for any asset at any time in history. Since banks were no longer paying anything close to the 3% or 3.5% yields that investors "needed" on their money, with other safe choices including U.S. Treasuries not providing sufficiently high returns, investors have wildly crowded into utility shares (XLU, FXU); real estate investment trusts (IYR, VNQ, REM, RWX); telecommunications companies (IYZ); tobacco producers; consumer staples (XLP, FXG, VDC); and similar sectors. As a result, many of these shares reached all-time record overvaluations and their lowest overall yields in history.<br /><br />What is the difference between participating in the internet bubble of 2000 and the high-dividend, low-volatility bubble of 2016? Other than the passage of sixteen years and somewhat smarter smartphones, not much has changed. In both cases, investors perceive that there is little risk in doing whatever everyone else is doing, as long as they have some rationalization for their actions. However, the financial markets have always punished those who invested the same way as most other investors, particularly when valuations reached all-time record overpricings. Not surprisingly, since they had completed all-time tops in July or early August, high-dividend and low-volatility securities have been among the biggest losers in percentage terms. While everyone seems to love owning these, whether for their yields or for any other reason, they can be comfortably sold short perhaps for as long as three years while providing annualized double-digit gains even after paying the dividends.<br /><br /><strong><span style="color: #44dd44;">Just because something is perceived to be safe doesn't make it so. If anything is trading near twice fair value, it runs a risk of dropping by more than half.</span></strong><br /><br />Nearly everyone is underestimating the potential downside risk for high-dividend and low-volatility assets. Many of the above funds had gained 300% or 400% from their previous recession bottoms. They aren't likely to surrender all of their gains, but they could easily fall by more than half and still remain far above their previous bear-market nadirs. Usually, the most popular sectors become the most detested, which had happened with internet shares when they plummeted nearly 90% overall from March 2000 through October 2002, and with the overloved Nifty Fifty from January 1973 through December 1974 when they slid by roughly 75%. Just because investors perceive stocks with higher dividends and lower long-term volatilities to be "safe" doesn't mean that they are.<br /><br /><strong><span style="color: #44dd44;">Real estate is really another high-dividend, low-volatility asset which has begun a major bear market in most global cities.</span></strong><br /><br />Real estate near all bubble peaks has been popularly perceived to be solid, but anything which reaches roughly double or especially triple fair value is always at risk of a dramatic subsequent decline. Many people have become aware of incredible, unsustainable gains for housing prices in cities including San Francisco, London, Tel Aviv, Vancouver, and New York, but very few people are aware that the total number of apartments available for rent has reached multi-decade or all-time highs in many of the above and similar well-known cities. Whenever prices are at double or triple fair value, regardless of the reasons (think of all the phony talk about "Chinese buying" and "unique local circumstances"), prices will inevitably regress toward the mean and beyond sooner or later.<br /><br /><strong><span style="color: #44dd44;">Previous bear markets are still perceived to be intact, even though commodity producers and emerging markets are by far the biggest winners of 2016.</span></strong><br /><br />If you were to look at a list of the top-performing exchange-traded, open-end, and closed-end funds of 2016, very few investors would correctly guess which securities are to be found there. The strongest-performing sector of 2016 by far has been silver mining shares, followed closely by gold mining shares. In spite of their powerful bull markets, whenever these experience sharp corrections as both have done during the past several weeks, they mostly experience net outflows and gloomy media commentary along with negative sentiment. According to Daily Sentiment Index, only 23% of traders are currently bullish toward gold and only 22% are bullish on copper. The two previous best buying opportunities during the past several months had occurred on the mornings after the bullish sentiment for gold had slumped to 15% on May 30 and 18% on August 31. The best time to buy any asset is when it is in a powerful uptrend but most traders are staunchly bearish.<br /><br /><strong><span style="color: #44dd44;">A drop exceeding 20% is not necessarily a bear market. A bear market can exist with a decline of much less than 20%.</span></strong><br /><br />Since many funds of gold mining shares had recently retreated more than 20% from their three-year highs, some commentators and technical analysts concluded that they were in bear markets. A bear market has nothing to do with the percentage drop from the previous high; it is defined by a sequence of lower highs from a multi-year top. Instead, most gold and silver mining shares had plunged to multi-decade bottoms on January 20, 2016, and have since formed several or more higher lows. Thus, they are in energetic bull markets when many think they are in bear markets. In addition, the previous bear markets for most commodity producers and emerging markets had become both severe and extended from April 2011 through January 20, 2016. Following such a sustained downtrend, it is emotionally difficult for most investors to accept that there has been a reversal. The longer that investors remain skeptical toward any new trend, the longer it will persist and intensify.<br /><br />Following silver and gold mining shares, the biggest winners of 2016 have been a variety of other commodity-related and emerging-market selections: base metal mining companies; Brazilian equities; coal mining shares; master limited energy partnerships; and other South American and Russian equity funds. If you had polled ten thousand traders at the beginning of the year, how many would have forecast that mining, energy, and South American/Russian stocks would be by far the biggest winners of the year? Especially now that previously outperforming high-dividend and low-volatility sectors have been among the biggest losers and have probably begun three-year bear markets, investors will progressively switch some of those trillions of dollars into other kinds of assets including commodity-related securities.<br /><br />Is the price of gasoline in a bear market? It had been in a multi-year downtrend since 2011, but it has increased substantially from its February 11, 2016 lows while notably retreating from highs set earlier in the year. Gasoline is still cheap, as the following photograph indicates, but it has been making several higher lows as is characteristic of a true bull market:<br /><br /><li><a href="http://truecontrarian.com/cheapsunset20160911.jpg" target="_blank">Cheap Sunset on September 11, 2016</a></li><br /><br /><strong><span style="color: #44dd44;">Most people believe the greenback is still in a bull market, but after it achieved a 12-2/3-year top on December 2, 2015, the U.S. dollar index has made over a dozen lower highs.</span></strong><br /><br />Unlike some of the mainstream financial media who foolishly believe that a 20% decline for an asset causes it to be in a bear market, very few investors realize that a sequence of a dozen or more lower highs following a multi-decade zenith means that an asset is suffering a true bear market. The U.S. dollar index has been doing exactly this for more than nine months, with very little media attention. The U.S. dollar is critical for all global investors, since it serves as the world's reserve currency and as the safe-haven asset of last resort. If people are piling into U.S. dollars, as they classically do during recessions or deflationary episodes, then it will discourage investing in most other currencies, in emerging markets, in commodity producers, and in assets including TIPs, I-Bonds, and other inflationary hedges.<br /><br />Be the first on your block to recognize that the greenback is in a bear market. Once you realize this, everything else fits into place. Other investors will eventually be forced to acknowledge this situation, but not until it is far too late to benefit from it. Before everyone else piles into assets which benefit from a slumping greenback, you can take advantage of prices which aren't as compelling as their multi-decade lows of January 20, 2016 but remain far below their historic averages and have mostly retreated moderately in recent weeks. Among the best choices are silver mining shares (SIL, SILJ, SLVP); gold mining shares (GDXJ, GLDX, RING); non-crude energy shares (URA, KOL, FCG, TAN); copper mining and other base metals shares (COPX, XME); and emerging-market equities (EWZ, RSX, GXG, NGE). It is no surprise that 1) all of the above are among the top-performing sectors of 2016; and 2) almost no one knows it.<br /><br />Here is a brilliant model of a three-ring circus on display at the Shelburne Museum in Vermont:<br /><br /><li><a href="https://www.google.com/search?q=three-ring+circus&amp;biw=640&amp;bih=381&amp;source=lnms&amp;tbm=isch&amp;sa=X&amp;ved=0ahUKEwiuzOPixIjPAhUE6SYKHeADCe4Q_AUIBigB&amp;dpr=1#imgrc=KuNDhYGNoLtJUM%3A" target="_blank">Three-Ring Circus Model, Shelburne Museum, Vermont</a></li><br /><br /><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong><br /><br />Whenever they have appeared to be irrationally depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain wildly overvalued. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 instead of climbing back above 100 as almost everyone is still expecting, this will lead to a major upward revision in global inflationary expectations. The latest pullback for many commodity producers has created some compelling buying opportunities, so be sure to seize them before they disappear. I was a very heavy buyer on June 27, 2016 when I made my largest total purchases since October 4, 2011 to capitalize upon the ridiculous post-Brexit panic. From my largest to my smallest position, I currently own GDXJ (some new), SIL (some new), KOL, GDX, XME, COPX, EWZ, RSX, GLDX, REMX, URA (some new), VGPMX, HDGE (some new), ELD, GXG, IDX, NGE, BGEIX, ECH, FCG, SEA, VNM, NORW, DXJ, BCS, PGAL, GREK, EPOL, EWW, RBS, TUR, RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG, SOIL, EPHE, and THD. I have recently increased my short positions in IYR, XLU, and FXG, in that order, largest to smallest.<br /><br />I expect the S&amp;P 500 to eventually lose two thirds of its August 23, 2016 peak valuation of 2193.81, with its next bear-market bottom perhaps occurring near the end of 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then. While the media have been quick to trumpet new all-time highs for the Dow Jones Industrial Average, the Nasdaq, and the S&amp;P 500 Index, hardly anyone has pointed out that the Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. The top for the Russell 2000 had occurred in June 2015 and so far has not been surpassed in this cycle. The failure of small-cap indices to reach new all-time highs as a group has frequently signaled major bear markets in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing had created valuations in July 2016 at roughly double fair value for most consumer staples, real estate investment trusts, and utilities, all of which have already begun to slump by half or more within three years or less.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-2022823511895081462016-08-02T04:02:00.000-07:002016-08-04T07:27:01.201-07:00<div class="separator" style="clear: both; text-align: center;"><br /></div><div style="-webkit-text-size-adjust: auto; font-family: Arial;"><a href="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/6RfuZEFQF4cLEKtmIUpii3jhRSxbSfbVgCPcB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>THE FIRST AND THIRD SHALL BE FIRST, WHILE THE SECOND SHALL BE LAST (August 1, 2016):</b> There is a fascinating pattern to the trading during the first seven months of 2016. The strongest sectors by far have exclusively been silver and gold mining shares, in that order, followed primarily by other commodity producers and mining-related emerging-market equities. The second-biggest percentage winners have mostly been high-dividend, low-volatility assets including consumer staples, utilities, REITs, tobacco shares, telecommunications companies, and long-dated U.S. Treasuries. The third-best performers of 2016 have been mostly energy companies and a variety of emerging-market stocks and bonds.</div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;">This is puzzling is because the first and third groups are inflation-loving assets, whereas the second group performs well when deflation reigns. How can the financial markets be both inflationary and deflationary?</div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;"><strong><span style="color: #44dd44;">The deflation trade is nearly over, but it has remained in a bull market due to huge inflows from investors desperate for yield.</span></strong></div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;">High-dividend and low-volatility assets including FXG and XLP (consumer staples), IYR and RWR (REITs), XLU, IDU, FXU, and VPU (utilities), along with TLT and ZROZ (long-dated U.S. Treasuries) have been among the second-best performers of 2016. They have also been among the top winners of the past five years. Many of those who have retired or who need to pay their monthly expenses have become overly dependent upon income-producing investments to generate yield. That's fine as long as high-dividend assets are either bargains or reasonably priced, but it creates a dangerous situation when they are trading at all-time highs even compared with previous historic peaks. There have been all-time record inflows into high-dividend and low-volatility funds which have far outpaced their previous records. A person who has retired with a half million or a million dollars might perceive that he or she "needs income" in order to maintain a basic lifestyle, and most of these investors don't realize that if everyone goes to their financial advisors and wants the same level of "safe" income then they are all going to end up owning the exact same assets. What would be reasonable for a tiny minority of investors has become an inevitable catastrophe since millions of others are acting similarly without realizing the consequences of collectively being in such an overcrowded trade.</div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;"><strong><span style="color: #44dd44;">The inflation trade has only been in a bull market since January 20, 2016, and has a long way to go to recover its losses since April 2011.</span></strong></div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;">Unlike most high-dividend assets which had bottomed in the first quarter of 2009, most commodity producers and emerging markets had been in severe downtrends from April 2011 through January 20, 2016, and even after their subsequent strong rebounds remain far below their previous peaks. Earlier this year, many of these assets completed multi-decade nadirs, with some of them touching levels not seen since the 1970s. Therefore, they remain substantially below fair value. Silver and gold mining shares including GDXJ, SIL, GLDX, SILJ, and GDX have tripled on average in just over a half year, and have thereby outpaced nearly all energy producers which had initially rallied but have gone out of favor along with most emerging-market equities during the past several weeks. This has created the best bargains for those assets which are in the process of completing important higher lows including URA (uranium), GXG (Colombia), FCG (natural gas), and FENY, a more diversified and less volatile fund of energy producers.</div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;">The Daily Sentiment Index for crude oil, indicating the percentage of traders who are bullish toward any asset, plummeted to 10% at the close on Monday, August 1, 2016. This is an incredibly low level for anything which is in a primary bull market, as energy commodities have been since February 11, 2016. The shares of energy producers mostly approached or reached multi-decade bottoms on January 20, 2016. Whenever it is possible to buy at higher lows during a major uptrend, this is ideal because a sequence of several higher lows is often followed by an accelerated rally.</div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;"><strong><span style="color: #44dd44;">The high-dividend and low-volatility bull markets are very stale and incredibly popular, while few know about the uptrends for commodity producers or emerging markets.</span></strong></div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;">Almost everyone knows that high-dividend shares have been the biggest winners of the past several years and are still eager to jump aboard the bandwagon, while few realize how overcrowded this bandwagon has become. Historically, the most wildly trendy and popular trades have always proven to be disappointing. Although it is rarely compared with the internet bubble of 1999-2000, the Nifty Fifty overvaluation of 1972-1973, or the blue-chip top of 1929, high-dividend and low-volatility names have become the bubble of the decade. The total assets in USMV, a frequently-touted low-volatility fund, have tripled in one year. Just as in 2000, almost no one who has invested in these securities realizes that they can lose half or more of their money. Almost no analysts, even those who know how overvalued these popular securities have become, can emotionally imagine them plummeting. They might know intellectually that it is possible, but they can't really imagine it happening any more than anyone at the beginning of the century could envision the Nasdaq plunging by more than 75% within three years. Alas, a similar fate awaits those who are participating in high-dividend and low-volatility shares and funds.</div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;"><strong><span style="color: #44dd44;">Just because you're in the water to get exercise doesn't mean you can ignore the great white sharks.</span></strong></div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;">When I point out the dangerous of owning high-dividend and low-volatility shares, I often hear the refrain that "I'm not in these due to their extreme popularity" or "I only own these to generate the income I need to pay my expenses." The market won't treat you differently just because your motivations are allegedly pure. You might be the nicest person on your block, you might generously donate to charities, and you might frequently help old ladies to cross busy streets. Even if you're swimming in the water just to get your daily exercise, you're not magically exempt from being eaten by hungry great white sharks that are lurking nearby. If any given trade has become desperately overcrowded, then no matter why you're involved in it, you're going to be as badly hurt as the ignorant buyer who is doing it to keep up with his poorly-informed friends. As Warren Buffett has stated, when we strip off the clothing and pretense, we're all fully exposed underneath. When the U.S. housing bubble collapsed in 2006-2011, as it about to do again in 2016-2021, it won't spare those who are nice to animals or who do good deeds. I will discuss real estate in more detail in the near future.</div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;"><strong><span style="color: #44dd44;">Disclosure of current holdings:</span></strong></div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;">Whenever they have appeared to be irrationally depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain wildly overvalued. As the greenback surprises most investors by accelerating its bear market, with the U.S. dollar index moving below 80 instead of climbing back above 100 as almost everyone is still expecting, this will lead to a major upward revision in global inflationary expectations. The latest pullback for energy-related assets has created some compelling buying opportunities, so be sure to seize them before they disappear. I was a very heavy buyer on June 27, 2016 when I made my largest total purchases since October 4, 2011 to capitalize upon the ridiculous post-Brexit panic. From my largest to my smallest position, I currently own GDXJ, SIL, KOL, GDX, XME, COPX (some new post-Brexit), EWZ, RSX (some new post-Brexit), GLDX, REMX, URA (many new), VGPMX, HDGE (very new), ELD, GXG (many new), IDX, NGE (many new), BGEIX, ECH, FCG, SEA (some new post-Brexit), VNM, NORW (many new), DXJ (all new post-Brexit), BCS (all new post-Brexit), PGAL (mostly new post-Brexit), GREK (mostly new post-Brexit), EPOL (all new post-Brexit), EWW (all new post-Brexit), RBS (all new post-Brexit), TUR (mostly new post-coup), RSXJ, RGLD, SLW, SAND, SILJ, EPU, FTAG (previously PLTM), SOIL, EPHE, and THD. I have very recently increased my moderate short positions in FXG, IYR, and XLU, in that order, largest to smallest.</div><br style="-webkit-text-size-adjust: auto; font-family: Arial;" /><div style="-webkit-text-size-adjust: auto; font-family: Arial;">I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring near the end of 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then. While the media have been quick to trumpet new all-time highs for the Dow Jones Industrial Average and the S&amp;P 500 Index, hardly anyone has pointed out that the Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in&nbsp;<a dir="ltr" href="x-apple-data-detectors://29" x-apple-data-detectors-result="29" x-apple-data-detectors-type="calendar-event" x-apple-data-detectors="true">2-1/2</a>&nbsp;years. The top for the Russell 2000 had occurred in June 2015 and is not likely to be surpassed in this cycle. Small-cap U.S. equities typically lead the entire U.S. equity market lower whenever we are transitioning from a major bull market to a severe bear market. This has happened in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing has created valuations at roughly double fair value for most consumer staples (FXG, XLP), real estate investment trusts (IYR, RWR), and utilities (XLU), all of which will likely slump by half or more within three years or less.</div>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-48056763579307935092016-06-28T05:42:00.000-07:002016-06-28T05:42:08.686-07:00“Generally, the greater the stigma or revulsion, the better the bargain.” --Seth Klarman<a href="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/USUjCQjL4eci2AQmGQDYlE9J8y-quTjcgCKgB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/USUjCQjL4eci2AQmGQDYlE9J8y-quTjcgCKgB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>WHO'S AFRAID OF A BIG BAD BREXIT? (June 28, 2016):</b> It is amazing that after centuries of history which investors can peruse at their leisure to see how the global financial markets have behaved in past decades and centuries, people keep repeating the same mistakes and experiencing identical emotional reactions. In the U.K., the day after the Brexit vote, the most commonly googled question was "What is the EU?" The overall impact will be zero, as these kinds of news headlines usually are; the only difference is the degree to which it has been broadcast around the world and how many people are convinced that something has actually changed. If you believe that a vote by confused citizens in the U.K. will impact corporate profits in Mexico or Poland, to cite two countries whose equity markets have been most negatively affected by the panic in recent days, then you can ignore the rest of this essay. Otherwise, you can take advantage of some amazing bargains in assets which had already been in bull markets since January 20, 2016, and which are likely to soon experience accelerations in their uptrends due to the reality--rather than the fantasy--of a falling U.S. dollar and a significant asset reallocation into emerging markets and commodity producers which in hindsight will have been one of the key themes of 2016-2017.<br /><br /><strong><span style="color: #44dd44;">Brexit is one of a series of periodic panics which have no long-term impact and are totally forgotten afterward.</span></strong><br /><br />It is interesting that Brexit was reported early on Friday, since that is the time of the week when news events tend to exert their greatest psychological impact on the markets. People begin to panic immediately, and then after a sharp drop on Friday they have the whole weekend to fret about how much worse things are going to be. This will consistently lead to a follow-through plunge on Monday, sometimes just during the first hour of trading, and on other occasions persisting throughout the trading day. Sometimes this will carry through further into Tuesday, as it had done during the October 1987 stock-market collapse and again at the beginning of October 2011, each of which were preceded by substantial gains. On other occasions, the panic ends at some point on Monday and is soon followed by an energetic recovery.<br /><br /><strong><span style="color: #44dd44;">The most compelling choices for purchase had been in bear markets since April 2011, are historically undervalued, and have been in bull markets since January 20, 2016.</span></strong><br /><br />I have recently been buying mostly funds of emerging markets and commodity producers which had been in severe extended bear markets since April 2011 which finally ended on or around January 20, 2016, and which had caused these securities to become dramatically undervalued and out of favor. Since then, many of them have made several or more higher lows which is characteristic of the early months of a bull market, while sentiment remains generally gloomy and had worsened considerably after Brexit. These include URA, a fund of uranium producers; COPX, a fund of copper mining companies; and the emerging-market funds GREK (Greece), EPOL (Poland), NORW (Norway), PGAL (Portugal), GXG (Colombia), and RSX (Russia). Most of the above, except perhaps for RSX, aren't even familiar to most investors and wouldn't be considered under most circumstances. Another fund which is rarely followed is SEA, a fund of sea shipping companies which has been almost entirely forgotten and is dramatically oversold. I purchased all of these on Monday (June 27, 2016) due to the likelihood that they are completing important higher lows in their bullish patterns of higher lows which had begun on January 20.<br /><br /><strong><span style="color: #44dd44;">Many British financial institutions have been incredibly punished merely for being headquartered in the U.K.</span></strong><br /><br />As proof of the highly emotional nature of investors' response to Brexit, the companies which are best known and which are most closely associated with Great Britain have experienced the biggest losses. Everyone has heard of BCS (Barclays), Royal Bank of Scotland (RBS), and Lloyd's of London (LYG), so these have been unusually hard hit since the Brexit vote. There have been an astonishing number of brokerage, analyst, and advisor downgrades of these and similar companies, even though their corporate profits will likely be almost completely unaffected by the news. As usual, if the actual impact is one or two tenths of a percent, the market reaction is twenty or thirty percent (or more, in some cases), thereby providing an ideal buying opportunity in all of the above and in similar companies.<br /><br /><strong><span style="color: #44dd44;">The Brexit overreaction has been even greater than for events which actually impact corporate profits.</span></strong><br /><br />Sometimes there is an event which will negatively impact a company's stock price and receives worldwide media coverage, such as the Exxon Valdez disaster or the British Petroleum catastrophe in the Gulf of Mexico. Other examples would include drug companies which don't receive approval for a particular drug, or which will have to pay money for widespread side effects. Even though Brexit is meaningless, it had roughly the same percentage effect on many companies as the above events which actually did affect corporate profits--although even in those cases the overreaction by investors was so severe that they presented worthwhile buying opportunities. A meaningless panic which is widely believed to be important is an even better buying opportunity than when there is something which will affect corporate profitability. In general, political events are treated with a much stronger emotional response than economic ones, and almost always have essentially zero impact on earnings growth. High-profile resignations, impeachments, elections, accusations of corruption, and similar news reports, especially when they are widely broadcast to the public, often provide the best opportunities to make money. In India, there was persistently negative political news in the summer of 2013 which created historic bargains, and then incredibly positive coverage of Modi's election in the spring of 2014 which caused most small-cap stocks in India to more than double in price within a year without anything actually changing for India's corporate profits.<br /><br /><strong><span style="color: #44dd44;">Ignore the hype and accumulate the most oversold securities.</span></strong><br /><br />Most funds of emerging markets and commodity producers had been at or near multi-decade bottoms on January 20, 2016, and have since begun what will likely become major bull markets. It had appeared that the best buying opportunities had already passed and would not likely be seen again, but Brexit has provided an opportunity to purchase many of these at true bargain levels. There are exceptions such as gold and silver mining shares, which is only because some media types recommended buying gold bullion after having disparaged this idea for many months. GDXJ is a fund of junior gold and silver producers. From their respective intraday lows (1067 for gold bullion, 16.87 for GDXJ) on January 20, 2016 through the close on Thursday, June 23, 2016, GDXJ had gained over 7.5% for each 1.0% rise for gold bullion which can be measured by GLD or IAU. Since then, however, the post-Brexit behavior has shown roughly a 1:1 ratio, indicating that gold will soon slump below 1300 U.S. dollars per troy ounce and could retreat further in order to shake out recent buyers who acted totally out of emotion and have no commitment to this sector; they will be out of the market as soon as their sell stops are triggered near 1300 and perhaps in smaller numbers near 1275 or thereabouts. In general, whenever gold and silver mining shares far outperform gold bullion, a major uptrend is underway; the recent underperformance by the shares of the producers is thus a warning not to chase after this sector until the shares once again outperform bullion. This will likely happen as funds like GDXJ, SIL, GDX, GLDX, and SILJ repeatedly recover from early intraday selloffs during the next several trading days even as gold bullion continues to generally slump lower. Once the ratios of June 23 are restored, this sector will be ready to enjoy the next phase of its powerful uptrend.<br /><br /><strong><span style="color: #44dd44;">I closed out my position in HDGE, but retained and added to my short positions in high-dividend shares.</span></strong><br /><br />I sold all my HDGE between 11.20 and 11.29 on Monday which I had purchased earlier in the month between 10.06 and 10.29. The intensity of the fear in the global financial markets made this action necessary, as I had similarly done when I sold all of my HDGE in early February 2016. There will be a better opportunity to repurchase HDGE at some point during the next several weeks or whenever VIX is near 13 again. I have continued to hold and to periodically add to my short positions in XLU (utilities), IYR (real estate investment trusts or REITs), and FXG (consumer staples), because these continue to be irrationally owned by millions who are desperate to achieve the 3%-4% yields they used to get from safe bank accounts and don't appreciate the extreme danger of participating in one of the world's most incredibly popular and therefore soon to be devastatingly money-losing trades. I am short FXG instead of XLP, a similar fund of consumer staples, because FXG has a much higher expense ratio.<br /><br /><strong><span style="color: #44dd44;">When in doubt, do the opposite of whatever you hear most frequently.</span></strong><br /><br />In the early months of 2009, this was the most common refrain: "I sold all my stocks and I'm cutting back as much as I can with my spending, and I can't understand why the economy has become so bad." If you hear every day, several times a day, why the global economy won't recover for many years, you will do exactly the opposite of what you should be doing. If all you read about is how Brexit means that the sky is falling and the end of the world will soon arrive, then you're likely to sell in a panic rather than buying aggressively. Those who voted for Brexit mostly had no idea what they did, and if they had to vote again many of them would choose not to leave. Even if Britain does leave the EU, the only impact will be a complex series of negotiations which will last for years or decades and will have close to zero impact on corporate profits or the interrelationships between assets. It is puzzling why so few people are able to realize the obvious, but that just makes it better for those who understand reality because it has created compelling buying opportunities for many emerging-market securities, the shares of commodity producers, and numerous British-related securities--as well as anything else which has suddenly plummeted in price since Friday morning. June 27, 2016 was my single heaviest day of buying since October 4, 2011. Be sure to gradually accumulate the most worthwhile assets before everyone else gradually realizes that the world will continue and the sun will keep rising in the east even over the U.K.<br /><br />Since the reaction by many assets is even greater than it had been during World War II, 9/11, and some "real" news instead of this meaningless vote, the following song by Dame Vera Lynn should inspire you to do some buying:<br /><br /><br /><li><a href="https://www.youtube.com/watch?v=d5aeClRY4kA" target="_blank">Dame Vera Lynn: White Cliffs of Dover</a></li><br /><br />Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain wildly overvalued. As the greenback surprises most investors by suffering a bear market, with the U.S. dollar index moving below 80 instead of climbing back above 100 as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. The latest Brexit panic has created a new set of compelling buying opportunities, so be sure to seize them before they disappear. From my largest to my smallest position, I currently own GDXJ, SIL, KOL, GDX, XME, COPX (some new), EWZ, RSX (some new), GLDX, REMX, VGPMX, URA (some new), ELD, GXG (some new), IDX, ECH, BGEIX, FCG, NGE (some new), SEA (some new), VNM, RSXJ, EPU, RGLD, SLW, SAND, GREK (some new), NORW (some new), PGAL (some new), EPOL (all new), TUR, SILJ, SOIL (some new), BCS (all new), EPHE, and THD. I have continued to increase my modest short positions in FXG, IYR, and XLU. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then--as is evidenced by the media falsely proclaiming in March 2016 that the bull market had celebrated its seventh birthday. The Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower whenever we are transitioning from a major bull market to a severe bear market. This has happened in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing has created valuations at roughly double fair value for most consumer staples (FXG, XLP), real estate investment trusts (IYR), and utilities (XLU), all of which will likely slump by about half within three years or less.<br /><br /><span style="color: orange;"><b>Question: What are the main implications you see Brexit having on the U.S. Economy?&nbsp;</b></span>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-3548809942523229312016-06-17T15:48:00.001-07:002016-06-17T15:48:06.913-07:00“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” --Seth Klarman<a href="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/USUjCQjL4eci2AQmGQDYlE9J8y-quTjcgCKgB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/USUjCQjL4eci2AQmGQDYlE9J8y-quTjcgCKgB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>NEARLY ALL ASSETS ARE EITHER ABSURDLY OVERVALUED OR WORTHWHILE BARGAINS (June 17, 2016):</b> It has been considerably less trendy to discuss the concept of fair value in recent years. Investors have been obsessed about the political situation and how that will impact the financial markets, or what is the latest trendy sector, or what will happen with Brexit, and many considerations which have nothing to do with whether something is overvalued or undervalued. If you analyze thousands of assets, both liquid and otherwise, you will soon discover that these fit into one of two categories. Either they are at or near their highest levels in history, both in absolute and relative terms, or else they had slumped to multi-decade bottoms during the first several weeks of 2016 and have since been moderately rebounding while remaining far below their tops from the past decade. Not surprisingly, most investors remain eager to buy the most overpriced assets, while remaining indifferent to accumulating true bargains.<br /><br /><strong><span style="color: #44dd44;">Most people today are following the dangerous path of stretching for yield.</span></strong><br /><br />Many investors think to themselves or say to their financial advisors something like this: "I need income in order to meet my living expenses. I used to get 3% or 4% from my savings accounts, but now they pay less than one percent. So I want to invest in whichever are the safest and most reliable assets which will give me an income of three or four percent each year." If only a few people thought this way, then there wouldn't be a problem. However, since perhaps a billion people suffer from this exact situation and are approaching it in the same way, it has created an extremely dangerous form of herding in which assets like utilities (XLU), consumer staples (FXG, XLP), and real estate investment trusts or REITs (IYR, RWR) have become so popular that they are trading on average for about twice their usual historic ratios of prices to profits, prices to dividends, and other classic measures of valuation. Some investors have purchased commercial or residential real estate where rental yields are similarly 3% or 4%, believing they are getting a worthwhile rate of return on their capital because it is considerably more than they would receive in a money market fund. U.S. Treasuries (TLT, IEF, IEI) are also exaggeratedly overvalued as those who don't trust corporations believe the government will always pay on time. The chance of default is essentially zero, but you can still lose a huge percentage of your money from Treasury yields moving higher especially when such an outcome seems impossible to most participants. I will go way out on a limb and forecast that the yield on the 10-year U.S. Treasury bond will exceed 3% in 2017, which almost surely seems absurd to most people because we have become irrationally accustomed to a much lower yield range in recent years.<br /><br /><strong><span style="color: #44dd44;">Regardless of how well-intentioned or intelligent its participants may be, any heavily overcrowded trade will always lose badly in the end.</span></strong><br /><br />Whenever any trade becomes incredibly crowded, there will inevitably be a subsequent severe shakeout. It's not different this time, and within a few years it is likely that those who are investing in the above assets will be severely disappointed. I expect all of the above, including listed securities and actual houses, to mostly end up losing half or more of their current valuations by the time their respective bear markets terminate in 2018 or 2019, and perhaps a year or two later for physical real estate. About a dozen people have contacted me to say they didn't personally buy these assets in order to be like everyone else, but for completely different reasons. The problem is that if you are swimming with great white sharks then it doesn't matter if you're only in the ocean to get your daily exercise; you have to deal with your fellow swimming companions. If you have been purchasing high-dividend shares for years for any reason, and all of a sudden everyone else is doing likewise, then you have to do something different until your method becomes unpopular again. The result will end up the same as it did for those who were crowding into internet shares in 1999-2000 and mortgage-backed securities in 2007. I could have also listed railroad shares in 1872 or canal companies' shares in 1836; the world may change through the centuries but the financial markets are always the same. If you own what everyone else also owns, regardless of your reasons or their reasons, you will all end up losing money together.<br /><br /><strong><span style="color: #44dd44;">Commodity producers have been the biggest winners for five months, with emerging markets second.</span></strong><br /><br />If you were to ask most investors which assets have been the biggest percentage gainers of 2016, very few would know that commodity producers led by gold and silver mining shares have gained the most especially when compared with their intraday bottoms of January 20, 2016, while many emerging-market funds have also outperformed the broad U.S. equity market. The sole exception among the top several dozen is a lone fund of zero-coupon Treasuries. Out of all non-leveraged non-ETN funds which invest in stocks or bonds, according to&nbsp;<a href="http://xtf.com/" target="_blank">xtf.com</a>, the biggest year-to-date winners of 2016 in order are SILJ, GLDX, SLVP, GDXJ, SIL, RING, SGDJ, SGDM, GDX, and PSAU, which all invest in gold and/or silver mining shares. Next are XME (metals mining), EPU (Peru), CNDA (Canada), RSXJ (Russia), SLX (steel), KOL (coal mining), NANR (natural resources), EWZ, EWZS, BRAQ, BRAZ, BRF (the last 5 all Brazil), DBS, SIVR, SLV (the last 3 all physical silver), COPX (copper mining), LIT (lithium mining), TPYP (energy pipelines), REMX (rare earth mining), and at long last ZROZ which is a fund of zero-coupon long-dated U.S. Treasuries.<br /><br />While many are aware of the persistent strength of high-dividend assets in recent years, very few people are aware of how well commodity producers have been doing during the past five months. These had mostly suffered dramatic bear markets from April 2011 through January 20, 2016, and thus became extremely out of favor with nearly all investors including institutions, advisors, and analysts. Their powerful rebounds haven't encouraged very many people to jump aboard the bandwagon, at least so far. It is rare to see someone dressed in a fancy suit on cable TV extolling the virtues of energy producers or mining companies, and just as uncommon to see someone telling you why you should invest in South America, Africa, Australia, or just about anywhere outside of the best-known developed equity markets. Just five years ago, you couldn't avoid hearing analysts tell you why you should have your money in the BRICs, and which mining companies were superior to others, and which energy subsector was likely to be the biggest winner in the upcoming year.<br /><br /><strong><span style="color: #44dd44;">Investors love owning whatever has been climbing for years, and shun whatever has been in an extended bear market.</span></strong><br /><br />The reason for the unpopularity is entirely emotional. Following the 2007-2009 bear market for U.S. equity indices in which the S&amp;P 500 plummeted 57.7% and the Russell 2000 slumped 60.0%, no one in early 2009 wanted to hear about the latest index fund or which high-yielding securities were the best bargains. Since the bear markets for nearly all commodity-related and emerging-market assets had lasted for nearly five years, investors have emotionally concluded that they are hopeless and aren't interested regardless of the fundamentals. On the other hand, since high-dividend shares have been rallying for more than seven years while real estate in most parts of the world has surged since 2011, these assets psychologically appear to be superior and investors feel highly confident of additional increases. Paradoxically, when risk is lowest and upside potential is highest, most people are indifferent or are afraid to participate, while the situations of lowest additional upside and greatest risk of price collapse are usually greeted with sunny optimism and complacency about potential losses.<br /><br /><strong><span style="color: #44dd44;">Almost nothing is trading close to its fair value.</span></strong><br /><br />At their intraday lows on January 20, 2016, many shares of commodity producers and emerging-market securities had traded at their lowest points since the previous century, in some cases going all the way back to the 1970s. They are almost all less glaringly underpriced today, but they remain at just one third to one half their average prices of recent decades. Thus, considerable additional upside remains in their rallies. Many people will finally discover these strong uptrends at the beginning of 2017 when they look at lists of the top-performing securities of 2016 and are surprised to see which names appear. While global equity and corporate bond markets are unlikely to collapse during the next twelve months or so, there will likely be significant declines for the most overcrowded sectors including especially the high-yielding ones mentioned near the beginning of this essay. Ironically, as investors at first gradually and later in a panic rush to get out of high-dividend assets, they will end up piling irrationally into commodity producers and emerging markets which have the potential of creating their own overvaluations perhaps in 2017. This could end up creating a situation roughly a year from now in which it will be necessary to sell commodity-related and emerging-market assets because far too many people will have jumped aboard these bandwagons. That would be especially true if investor excitement is accompanied by notable insider selling by top executives of these companies as there had previously been in years including 2008 and 2011. However, that is something to worry about next year. This year, gradually accumulate whichever undervalued assets are currently the least desired.<br /><br />Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain wildly overvalued. As the greenback surprises most investors by suffering a bear market, with the U.S. dollar index moving below 80 instead of climbing back above 100 as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, SIL, KOL, GDX, XME, COPX, EWZ, HDGE, RSX, GLDX, REMX, VGPMX, URA, ELD, GXG, IDX, ECH, BGEIX, NGE (some new), FCG, VNM, SEA (some new), RSXJ, EPU, RGLD, SLW, SAND, GREK, NORW (new), PGAL, TUR, SILJ, SOIL, EPHE, and THD. I have continued to increase my modest short positions in FXG, IYR, and XLU. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then--as is evidenced by the media falsely proclaiming in March 2016 that the bull market had celebrated its seventh birthday. The Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower whenever we are transitioning from a major bull market to a severe bear market. This has happened in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by investors who begin with the premise that they want to generate income of 3%-4% and look for the most stable securities which can generate such yields. This popular and extraordinarily dangerous method of investing has created valuations at roughly double fair value for most consumer staples (FXG, XLP), real estate investment trusts (IYR), and utilities (XLU), all of which will likely slump by about half within three years or less.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-11073059796958670792016-05-20T13:00:00.003-07:002016-05-20T13:00:36.090-07:00"We don't have to be smarter than the rest. We have to be more disciplined than the rest." --Warren Buffett<h3><br /></h3><a href="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/USUjCQjL4eci2AQmGQDYlE9J8y-quTjcgCKgB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/USUjCQjL4eci2AQmGQDYlE9J8y-quTjcgCKgB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>WHEN BUYING ASSETS, SELECT OLD BEARS AND YOUNG BULLS (May 20, 2016): </b>There are many criteria which investors use in making buying and selling decisions. Unfortunately, the vast majority of these decisions are emotional rather than rational. People buy assets which appear to be superior, without realizing that this perceived excellence is actually due almost entirely to outperformance in recent years. Similarly, investors will tend to sell assets which they believe are inferior, without understanding that if something has been in a severe extended downtrend then it will almost always appear to be hopeless when it could be ready for a powerful rally. In other words, most investors subconsciously project the action during the past several years into the next several years, thereby nearly always ending up buying assets which will soon begin bear markets and selling assets which are about to enjoy spectacular percentage gains.<br /><br /><strong><span style="color: #44dd44;">A tale of two outperformers: commodity producers and emerging markets versus high-dividend favorites.</span></strong><br /><br />The top sectors of 2016 have fallen into two completely different categories. The best performers have been gold and silver mining shares (GDXJ, GDX, GLDX, SIL, SILJ), with other commodity producers in mining (COPX, REMX) and energy (OIH, KOL) along with emerging-market assets in numerous countries (EWZ, GXG, RSX, NGE). Not far behind are high-dividend sectors, especially utilities (XLU), real estate investment trusts (IYR), and consumer staples (FXG, XLP). This is somewhat surprising, since both groups of securities behave very differently. Commodity producers and emerging markets normally love rising global inflationary expectations and worldwide GDP growth, while high-dividend shares tend to perform best when deflation reigns and there are fears of an economic contraction. Which of these two is likely to persist in its powerful uptrend?<br /><br />With most commodity producers and emerging-market assets having approached two- and three-decade bottoms on January 20, 2016 and/or February 11, 2016, their bull markets have been in existence for only four months on average. In most cases, their bear markets had begun following major tops in April 2011, and had suffered total declines averaging 70%-90%. A young bull market following a historic washout often leaves huge remaining upside, since even if these shares merely return to their highs of 2014 or 2013 then they could double or triple from their current levels; some of them have already more than doubled since their respective January 20, 2016 nadirs. Almost anyone who wanted to sell shares of commodity producers or emerging markets had plenty of opportunities to do so, as is evidenced by all-time record outflows from many funds in these sectors during the second half of 2015 and the first few weeks of 2016.<br /><br />In sharp contrast, most high-dividend shares had bottomed either during the fourth quarter of 2008 or during the first quarter of 2009, and thereafter enjoyed bull markets which lasted for more than seven years. A seven-year bull market is like a 100-year-old person running the marathon: you are quite impressed, but you know he or she won't be running many more marathons. It is possible and perhaps even likely that most high-dividend shares have already begun bear markets, although this won't be known for sure until after significantly greater losses have occurred. One major drawback to owning shares which pay 3% or 4% yields is that far too many investors have become disenchanted with bank deposits paying 1% interest or less, and have therefore crowded into high-yielding assets in a desperate attempt to achieve a modest income. There have been all-time record inflows into many high-dividend sectors in recent months. When too many people are pursuing the same concepts, regardless of their reasons for doing so, such assets become dangerously overpriced. On average, high-yielding assets have price-earnings ratios which exceed the overall price-earnings ratios for the S&amp;P 500 Index and the Russell 2000. Utilities, real estate investment trusts, and consumer staples overall have never been more overvalued in their entire history, even when compared with major past bull-market peaks.<br /><br /><strong><span style="color: #44dd44;">Begin with fair value, and tilt toward buying into the longest bear markets while selling into the longest bull markets.</span></strong><br /><br />Before making any trading decision, it is important to calculate fair value for any asset which you plan to trade. If you believe that something is far below fair value, then ask yourself why this is the case. If something has been declining for several years, then many investors will tend to sell it regardless of fundamentals. They may be disappointed about its persistent underperformance, or they can't bear to miss out on chasing after something which has been climbing or which is mentioned frequently in the media, or they may hate to wake up and look at the securities in their portfolios which seem to keep going down, or they may actually believe that they can make money by following various momentum strategies. Generally, the best assets to purchase are those which are either in bear markets which have persisted for a very long time and have lost a dramatic percentage of their previous peak valuation, or else had recently fit into this category and have been choppily rebounding in recent weeks or months. There are pros and cons to buying into the most oversold points on the way down versus buying into higher lows as they are created on the way back up, which I will discuss in more detail in a future update.<br /><br />A key principle is to assiduously avoid buying anything which has been in a powerful extended uptrend for several years. Such assets will attract the attention of many investors who become enamored by its apparent invincibility, or who love to chase after recent outperformance, or who emotionally like to think they own winners even if they missed out on most of the gain to be enjoyed because they bought far too late, or because something which has been climbing for several years has usually received persistently optimistic media coverage which tells people why they should own such assets. Even if something is far above fair value, you will almost never read anything negative which will warn you against purchasing something which is clearly overpriced. You only see negative stories about something which has already suffered sharp declines, as analysts "explain" why those losses have occurred and tell you why they will get worse. It is easy to become brainwashed by these messages simply by hearing them repeated frequently.<br /><br /><strong><span style="color: #44dd44;">Prefer youthful bull markets following extended bear markets. Disfavor ancient bull markets.</span></strong><br /><br />Even though you may wish to own anything which has been outperforming in 2016, stick with those assets which had suffered multi-year bear markets and have just been recovering for four months, rather than assets which are wildly overpriced and have been mostly in uptrends for more than seven years. The former group will continue to rally strongly because they remain intrinsically undervalued and are still unpopular, with most brokerages and analysts continuing to shun them and even to downgrade them in recent weeks. Some of these funds like GDX have continued to experience net outflows regardless of their spectacular gains since January 20, 2016. High-dividend shares have become so popular with amateurs, institutions including hedge funds, and just about everyone that they make excellent short positions. This is especially true for U.S. assets in these sectors which had enjoyed the massive global surge into U.S. stocks, bonds, real estate, the U.S. dollar, and just about everything else with a United States pedigree in recent years. Commodity producers located in emerging-market countries had been the world's most depressed and undervalued securities four months ago, and in spite of having doubled or tripled in some cases would have to double, triple, or quadruple again to finally surpass their April 2011 highs.<br /><br /><strong><span style="color: #44dd44;">Choose assets for which there is no reason to own them.</span></strong><br /><br />The financial markets have always been a paradox. If there is a valid reason to own any asset, especially if that reason can be easily explained to others, then almost everyone else will have heard and believed the story and will have already purchased it. This will cause such assets to become dangerously overvalued. On the other hand, if there is no easy explanation for why you should own something, then very few people will be eager to participate, and the asset will tend to be substantially undervalued and thus an excellent bargain. Low bank interest rates give investors a perfect excuse for possessing high-dividend shares, and therefore you must avoid the temptation to own them along with everyone else. No one can easily comprehend why they should own shares of commodity producers or emerging-market securities, and therefore you should capitalize upon their unpopularity. Once you hear on a daily basis about why you should own these as an inflationary hedge, or because so-and-so genius has been buying them, or just because they're going up, then it will be getting close to the next selling opportunity.<br /><br />Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, GDX, COPX, HDGE, REMX, EWZ, RSX, GLDX, VGPMX, URA, GXG, FCG, IDX, ECH, BGEIX, NGE, VNM, RSXJ, EPU, TUR, SILJ, SEA (new), SOIL, EPHE, and THD. Yes, HDGE is back on the list as of my previous update (see below) after having sold all of it just before it had peaked near 13. I have continued to increase my modest short positions in FXG and IYR, and I am also modestly short XLU. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then--as is evidenced by the media falsely proclaiming in March 2016 that the bull market had celebrated its seventh birthday. The Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which has been withdrawn from safe bank accounts by conservative investors deluded into believing that these are nearly as safe as government-guaranteed time deposits; these make excellent short positions and include consumer staples (FXG, XLP), real estate investment trusts (IYR), and utilities (XLU).TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-80307558496685704302016-04-20T10:33:00.002-07:002016-04-20T10:33:31.696-07:00 "Sometimes the bulls win; sometimes the bears win; but the hogs never win." --Anonymous<a href="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/USUjCQjL4eci2AQmGQDYlE9J8y-quTjcgCKgB/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/USUjCQjL4eci2AQmGQDYlE9J8y-quTjcgCKgB/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>IT IS TIME TO BE BEARISH TOWARD MOST U.S. ASSETS (April 20, 2016): </b>It is fascinating how nearly all investors, analysts, advisors, and the media had been negative toward risk assets in January and early February 2016 and talked about "reducing risk," and now the same people have been talking about "getting back into the market" and what you should buy now. People will repeatedly buy high and sell low, because it is emotionally so difficult to do the opposite of the thundering herd. Therefore, having sold all of my HDGE shortly before it peaked near 13, which had represented roughly 8% of my total net worth, I began repurchasing it again during the past week into all pullbacks and plan to continue to buy it as long as it remains below 11 dollars per share. I also entered my first-ever short positions in FXG and IYR and plan to sell short XLU soon.<br /><br />The reasons for my being bearish are not primarily about price or timing, although it is true that many U.S. sectors have never been more overvalued in their entire history including years like 2007, 2000, 1972, and 1929. Among those sectors experiencing record overpricing are consumer staples (XLP, FXG), utilities (XLU), and real estate investment trusts or REITs (IYR). Consumer staples are extremely popular for two reasons: 1) they had enjoyed among the biggest percentage gains for all sectors outside of biotechnology during the past five years, in spite of mediocre profits for these companies; and 2) they have become the darlings of people who took their money out of bank accounts paying 1% or less in order to capture their modest dividends which have never been lower in percentage terms. Everyone loves a winner, so people have ignored the mediocre profit growth in consumer staples and concentrated instead on the stock price appreciation. Buying any sector with especially oversized gains and lackluster earnings is never a recipe for success, since this signifies a dangerous overvaluation. I have sold short FXG rather than the more popular XLP because it has a much higher expense ratio. IYR is also an excellent short position due to real estate having become even more overvalued in many parts of the world than it had been during the 2006 bubble. Utilities have also become the darlings of those chasing yield, making this sector more overvalued than at any time in its long history. There have been times when almost everyone was bearish toward utilities and I felt as though I was the only one in the world who was buying. Today, it is just about the exact opposite.<br /><br />There are many reasons why U.S. assets, other than commodity producers which mostly remain compelling bargains, became so overvalued in recent years. Persistent underperformance and price/earnings ratio collapses for emerging-market equities, combined with a generally climbing U.S. dollar, made U.S. stocks seem like the safest game in town. Recently, the greenback has been in a downtrend since the U.S. dollar index had peaked on December 2, 2015 at 100.51, thereby exposing the irrational overvaluation of U.S. equities, corporate bonds, and other assets relative to those in most other parts of the world. While the S&amp;P 500 Index has more than tripled from its March 6, 2009 nadir of 666.79, many emerging-market equity bourses on January 20, 2016 were trading even lower than at their most depressed points of late 2008 and early 2009, and even compared with previous bear-market bottoms in 2002, 1998, 1994, and 1990. Whenever you can buy a basket of assets which are trading near 20- and 30-year bottoms, it is almost always a good idea to do so regardless of the alleged reasons for such undervaluation. Similarly, whenever you can sell something like a house in San Francisco or a basket of biotechnology shares which are trading at incredibly overpriced levels, you should accept the market's gift and take advantage of others' temporary folly.<br /><br />HDGE is the only exchange-traded fund which sells short directly instead of using various artificial preservatives for doing so. Therefore, it has a somewhat higher expense ratio. This should not be an obstacle to purchasing it, and if you hold it for more than a year you will achieve favorable U.S. federal long-term capital gains tax treatment. Selling short directly is a reasonable alternative, which is why I mentioned my favorite overvalued funds in earlier paragraphs. If you have money in general U.S. equity and corporate bond funds, then now is an excellent time to sell them to take advantage of valuations which are close to their all-time highs and are likely to drop by 60% or more.<br /><br />Many people don't believe that U.S. equities can decline by 60%, even though we have already experienced two severe bear markets since 2000. From March 10, 2000 through October 10, 2002, the Nasdaq plummeted 78.4%. In the 2007-2009 bear market, the S&amp;P 500 lost 57.7% while the Russell 2000 declined by a total of 60.0%. I expect somewhat greater losses this time primarily because we had become more overvalued, so we have to drop by a greater percentage to roughly match the March 2009 lows. The Nasdaq is an especially glaring case of overpricing. As you can verify by going to&nbsp;<a href="http://finance.yahoo.com/" target="_blank">http://finance.yahoo.com</a>&nbsp;and entering ^IXIC, if the Nasdaq were to merely return to its October 31, 2007 top of 2861.51 then it would represent a plunge of 45.3% from its July 20, 2015 zenith of 5231.94. And this would be if it were to merely return to its previous bull market peak, not if it were to follow a much more likely route of approaching a previous major bottom. Biotechnology shares, which have been the biggest percentage winners of the past five years in spite of inconsistent earnings growth in this sector, have already been in downtrends along with many other equity sectors which had previous been leaders. When the former winners are pointing the way lower, that is an especially dangerous time to participate.<br /><br />We have also experienced many of the classic signs of a market top. The ratios of insider selling to insider buying have approached their unusually high levels from the middle of 2015 and are usually only seen just before a major bear market. Investor inflows into most U.S. stock and bond funds surpassed all-time records for thousands of such funds during the past two months. The media, which for part of January and early February had featured more bearish than bullish articles about risk assets, have recently stopped even asking about whether you should be a buyer and have instead focused on what you should buy now for the biggest gains. VIX dropped below 13 for the first time since October 2015, indicating that investors have lost nearly all their fear of lower valuations.<br /><br />I plan to remain long outperforming commodity producers and emerging-market assets. These will periodically suffer sharp short-term pullbacks, but have all begun powerful bull markets after having suffered extended, severe bear markets from April 2011 through January 20, 2016 when many of them registered multi-decade lows. Whenever other risk assets are attempting to rebound, mining and energy shares will continue to be among the biggest percentage gainers for approximately one more year until they become incredibly popular with investors, analysts, advisors, and the media. This is still a long way off: GDX, the most popularly traded fund in these sectors by average daily volume, has continued to experience outflows nearly every single day during the past several weeks in spite of being among the top-performing funds of 2016. As long as a bull market is greeted with intensified outflows instead of inflows, it will continue and will accelerate until disbelievers are finally converted into new buyers.<br /><br />Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, COPX, GDX, HDGE, EWZ, RSX, REMX, GLDX, VGPMX, URA, GXG, FCG, IDX, ECH, BGEIX, NGE, VNM, RSXJ, EPU, TUR, SILJ, SOIL, EPHE, and THD. Yes, HDGE is back on the list; I just added very small short positions in FXG and IYR, and I am currently buying HDGE this week after having sold all of it just before it had peaked above 13. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in 2018. As with all bear markets, the biggest losses will likely occur in its final months, and won't even be acknowledged as a bear market until then--as is evidenced by the media falsely proclaiming in March 2016 that the bull market had celebrated its seventh birthday. The Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, trading at their lowest levels during January 2016 in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which was withdrawn from safe bank accounts by conservative investors deluded into believing that these were nearly as safe as government-guaranteed time deposits. Excellent short positions include FXG, IYR, and XLU.<br /><br />Special note: if you enjoy theater and you would like to attend an evening of my original "true contrarian" playwriting, you are invited to join us at the end of the month:<br /><br /><li><a href="http://cherryblossomplayers.com/" target="_blank">Original Parodies of Corporate Life</a></li>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-9812549074473665092016-04-04T16:15:00.002-07:002016-04-04T16:15:29.139-07:00"No price is too low for a bear or too high for a bull." --Anonymous<a href="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxAYANWeq5bePdTwrtEs4pTWg/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://2.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxAYANWeq5bePdTwrtEs4pTWg/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>MOST INVESTORS MISUNDERSTAND BEAR MARKETS (April 4, 2016): </b>If there is one defining characteristic of bear markets for U.S. equities, it is the failure of nearly all participants to recognize when they exist, to acknowledge that they require asset reallocation, and to make appropriate changes to their portfolios. If we look back at all of the past bear markets in U.S. history, then even when they had been underway for a year or more, the vast majority of investors continued to act as though nothing had changed. They continued to buy and sell as though we were still in the previous bull market. Finally, when the bear market was in its final stages, it was usually accompanied by a collapse which at long last awakened people with the realization that we weren't in a bull market anymore. By then, however, it had become far too late to sell at anything close to favorable prices. Once a collapse becomes particularly extended or severe, or both, investors will end up doing the exact opposite of intelligent reallocation by emotionally selling during a bottoming process instead of increasing their risk to accumulate compelling bargains.<br /><br />The bear market of 2007-2009 serves as a useful illustration of some of the above points. That bear market began, as so many do, with initial weakness for high-yielding securities including utilities and REITs. Soon afterward, high-yielding junk bonds completed their peaks and began underperforming. After June 1, 2007, small-cap U.S. equity indices notably underperformed their large-cap counterparts. By August 2008, nearly all U.S. equities and corporate bonds had been in downtrends marked by numerous lower highs, but most investors continued to behave as though we were still in a bull market. Whenever U.S. equity indices and their funds like QQQ would rebound from any intermediate-term low along the way, there would be significant inflows into equity funds because investors had learned during 2002-2007 to buy into rallies which followed all corrections. Of course they had finally learned the wrong lessons, and acted as they should have done five years earlier when legitimate bargains were easy to find but almost no one wanted to participate. Then we had September-November 2008, which finally achieved clarity when it was far too late to be able to sell at worthwhile high prices. Especially when the S&amp;P 500 was down by more than half, investors ended up making their greatest outflows in history from most sectors, with these withdrawals even exceeding those which had occurred during the Great Depression. During the first quarter of 2009, when investors should have been buying left, right, and center, people mostly sold instead of making purchases at the lowest inflation-adjusted valuations since the early 1980s.<br /><br />In case you think that investors learned from their experience of 2007-2009, their behavior demonstrates that they are making the same mistakes again. From early March 2009 through early March 2014, small-cap U.S. equities outperformed large-cap counterparts by a ratio of roughly 3 to 2. During this five-year period, investors continued to mostly make net outflows instead of buying, partly because they were frightened by above-average volatility. From early March 2014 through May-June 2015, most U.S. equity indices continued to make higher highs, but the Russell 2000 (IWM) gained progressively less than the S&amp;P 500 (SPY) in percentage terms. There have been all-time record inflows into most equity funds in recent years, with huge net deposits occurring during the past several weeks. Since the second quarter of 2015, nearly all U.S. equity indices have been in little-recognized and unappreciated bear markets. The financial media a month ago loudly trumpeted the alleged "seventh anniversary" of the bull market even though the uptrends for U.S. equity indices had nearly all ended the previous year.<br /><br />On December 15, 2006, VIX completed a historic bottom at 9.39 and thereafter formed several higher lows even as U.S. equity indices including the S&amp;P 500 continued to climb for most of the following year. This was a valuable warning signal that we were getting set to transition from a major bull market to a severe bear market. When the bear market was in its final months, VIX topped out at 89.53 on October 24, 2008, and continued to make several lower highs even as the S&amp;P 500 itself continued to grind to lower 12-1/2 year lows through its 666.79 nadir on March 6, 2009. This process has repeated in the current cycle, with VIX bottoming at a 7-1/2-year low of 10.28 on July 3, 2014. As in 2006-2009, VIX foreshadowed the end of the bull market by a little less than a year. On Friday, April 1, 2016, VIX slid to 13.00 as it is completing yet another higher low. Eventually, VIX will achieve some kind of elevated zenith and will begin to form a pattern of lower highs, thereby signaling that the current bear market--which by then will likely have intensified sharply--will be several months away from beginning its next strong bull market.<br /><br />However, instead of recognizing these cyclical patterns and acting upon them, most investors end up repeatedly and foolishly projecting the recent past into the indefinite future. This is partly because our brains are hardwired to do this as it served as a useful way for groups of humans to survive in prehistoric times. Thus, many investors today are eagerly crowding into utilities (XLU), real estate investment trusts or REITs (IYR), and consumer staples (XLP), even though all of these have never been more overvalued in history. Therefore, we are going to suffer especially large percentage declines for these sectors relative to the overall U.S. stock market which itself is perched precariously roughly 50% above fair value. In many global cities, real estate is at double or triple fair value. Paradoxically, most people will want to sell their stocks and corporate bonds two years from now when they should be aggressively buying, and will want to do no selling of real estate or stocks today when they could obtain highly favorable prices for both.<br /><br />The following link highlights how investors were making significant outflows near the beginning of the year when stocks and corporate bonds were much lower than they are now, and have recently been eagerly pouring back into U.S. assets at overvalued prices:<br /><br /><li><a href="http://www.marketwatch.com/story/investors-pulled-24-billion-from-equity-funds-so-far-in-january-2016-01-22" target="_blank">Investors Pull $24 Billion from Equity Funds in January</a></li><br /><br />Now is an excellent time to be a true contrarian. When everyone you know is eagerly "getting back into the market," progressively sell your U.S. stocks, bonds, and real estate. Put some money into cash or a government-guaranteed bank account, and slowly accumulate shares of the most undervalued assets in emerging markets along with the shares of commodity producers, especially as these are forming additional higher lows following their respective multi-decade bottoms which were mostly completed on or around January 20, 2016. Perhaps in a year or so it will make sense to gradually unload these holdings so you are almost entirely in cash, with the important exception of buying TLT and other long-dated U.S. Treasury securities if they should slump to multi-year lows. Almost no one expects TLT to drop to 120, much less a far lower target like 100, so if there is panic and gloom in the U.S. Treasury market then prepare to be a big buyer in another year when everyone else is telling you why you should be selling.<br /><br />Do not rely too heavily on the assumption which others will be making, which is that if we are in a true bear market then it will likely be a repeat of 2007-2009. That bear market lasted for only 17 months, so instinctively people will assume that the recent past will repeat itself. Most bear markets are longer, and it will take time to flush out millions of those investors who would usually have their money in bank accounts but who have foolishly concluded that it is almost as safe to have their money in various stock and bond sectors. Assuming that most U.S. equity indices had topped out in May or June 2015, the ultimate bear-market bottoms might occur during 2018. Each time we slide to a lower low and rebound sharply, many will proclaim that we had reached "the bottom" and will be eagerly buying. Within a few months or less, we will slump to another lower low. Eventually, almost everyone will be exhausted from making additional purchases and soon finding themselves deeper in the red, and will refuse to buy when a strong recovery is underway. This, combined with extreme gloom and doom in the media and by nearly all analysts and advisors recommending that their clients "take steps to reduce risk" will signal that the next powerful bull market is truly underway. If such a bull market begins around 2018 then it could persist until 2021-2023.<br /><br />Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, COPX, GDX, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, EPU, TUR, SILJ, SOIL, EPHE, and THD. I may end up buying HDGE which I had sold in its entirety during the third week of January 2016. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in late 2017 or in 2018. The Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, recently trading at their lowest levels in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. The most overvalued sectors rely on the overhyped deflation trade and money which was withdrawn from safe bank accounts by conservative investors deluded into believing that these were nearly as safe as government-guaranteed time deposits.<br /><br />Special note: if you enjoy theater and you would like to attend an evening of my original "true contrarian" playwriting, you are invited to join us at the end of the month:<br /><br /><li><a href="http://cherryblossomplayers.com/" target="_blank">Original Parodies of Corporate Life</a></li>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-81818311899368364492016-02-23T11:20:00.002-08:002016-03-18T07:47:44.667-07:00"Our party has been accused of fooling the public by calling tax increases ‘revenue enhancement’. Not so. No one was fooled." --Dan Quayle<div style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><a href="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; color: black; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><span style="color: white;"><strong>NUMEROUS NEW TRENDS HAVE QUIETLY BEGUN (February 23, 2016):</strong> One of the most underappreciated features of 2016 has been the number of trend reversals which are already underway but which have been ignored by most investors or dismissed as being temporary deviations which will soon return to their previous behavior. Because so few accept these new bull and bear markets as being significant, only the few who recognize their importance have been investing in the anticipation that these newer trends are likely to continue, with their usual backing and filling, until they eventually accelerate and force nearly all investors to acknowledge their existence. It is worthwhile to point out which of these trends have reversed direction after years of moving the other way, and what is likely to happen during the next year or so.</span></div><span style="color: white;"><br style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;" /></span><span style="color: white;"><br /></span><div style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: white;">Some of these trends have already been underway for a year or more. Small-cap U.S. equity indices and their funds, including IWM which tracks the Russell 2000, had been outperforming the S&amp;P 500 and similar large-cap indices for five years. From early March 2009 through early March 2014, IWM tended to gain about 3 dollars for each 2-dollar increase in the S&amp;P 500, thereby enabling it to approximately quadruple while the S&amp;P 500 was tripling. However, since the first week of March 2014, IWM and other small-cap baskets have been notably underperforming the S&amp;P 500, with most of them slumping to 2-1/2-year bottoms during January 2016. Whenever they are temporarily oversold and there is too much gloom and doom in the media, these indices will rebound for several weeks or so, but their primary trend remains firmly downward and will likely surprise everyone with the total percentage losses which they suffer by the time they complete their next bottoming patterns perhaps in 2018. IWM topped out in June 2015, and it has become increasingly likely that the S&amp;P 500 reached its highest point of 2134.72 on May 20, 2015.</span></div><span style="color: white;"><br style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;" /></span><span style="color: white;"><br /></span><div style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: white;">Some assets began bear markets even earlier than the above well-known U.S. indices and funds. Most high-yielding shares including utilities (XLU), REITs (IYR), and U.S. Treasuries (TLT) were extremely popular in 2014 and completed important topping patterns in January 2015. Utilities and Treasuries have been outperforming the broader market in recent months, as they often do during a flight to defensive sectors, but all of the above sectors are likely to soon resume their downtrends even if general equities are able to enjoy a more sustained recovery during the next several weeks. These sectors tend to signal changes in inflationary expectations, so especially if they resume their downtrends and retreat to lower lows, it will signal that the widespread belief in deflation will eventually give way to the realization that inflation has been quietly rising worldwide.</span></div><span style="color: white;"><br style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;" /></span><span style="color: white;"><br /></span><div style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: white;">While most investors continue to believe that the shares of commodity producers and emerging markets are continuing their bear markets which mostly began in April 2011, it is likely that most or all of these have reversed during the past several weeks. Some of the assets in these sectors have already rebounded dramatically, including gold and silver mining shares which have mostly gained more than 40% from their respective bottoms from the third week of January. It is common for gold and silver mining shares to lead energy and emerging-market assets both higher and lower, and it appears that although they remain very choppy in the short run, the shares of energy and emerging-market securities mostly bottomed in the second half of January or the first half of February 2016. Media coverage had been persistently negative toward the above assets, with most analysts and brokerages continuing to project aggressive downside targets as recently as a month ago. As the prices of commodity-related assets have been progressively rising, most of those in the media and financial industries have been very slow to adjust their previous forecasts and portfolios to reflect what could end up being a dramatic change of fortune. As is usually the case, the best-informed insiders and their wealthy friends have been among the first to make appropriate asset reallocations, while most investors won't do so until these trends have already become too powerful to ignore and more than half of the potential percentage profit from these opportunities will have already passed.</span></div><span style="color: white;"><br style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;" /></span><span style="color: white;"><br /></span><div style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: white;">After moving mostly sideways for roughly nine months, the U.S. dollar index has been forming a notable pattern of lower highs since it had finally surpassed its March 2015 peak to register a key top on December 2, 2015 at its highest point since April 2003. This pattern of lower highs is likely to continue for roughly another year and perhaps a few months longer than that. Throughout 2015 there had been an increasing number of speculative bets on a higher U.S. dollar along with more intensely bullish market commentary and analysts raising their upside targets for the greenback. As a rule, increasing excitement and optimism combined with flat prices is a dangerous combination. It will take time before investors recognize that this long-term pattern since 2011 has also reversed; when they are finally forced to acknowledge that life in 2016 is not the same as it had been in recent years, the downtrend for the U.S. dollar could accelerate. Even if it continues in leisurely fashion, it will exert a meaningful influence on all other assets.</span></div><span style="color: white;"><br style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;" /></span><span style="color: white;"><br /></span><div style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: white;">There hasn't been much discussion about real estate in recent months, although Tuesday morning's report on U.S. existing homes showed the 47th-consecutive month of year-over-year gains for U.S. housing prices. In most of the rest of the world, real estate has been climbing for a similarly extended period of time. As we have seen with many other trends described above, anything which lasts for four or five years tends to eventually be accepted as some kind of "permanent" situation whenever it is most likely to soon reverse. I expect that just as almost everyone is expecting housing prices to continue to climb indefinitely, we will experience massive losses in most parts of the world during the next four or five years. Instead of housing prices to household incomes demonstrating their normal historic ratios of 3:1 which have existed for centuries or millennia, and which had been lower than 1.5 to 1 in many regions in 2011, there are neighborhoods in cities including San Francisco, Vancouver, and Tel Aviv where ratios are greater than 10:1. Many other cities are more than double their normal levels, which creates a bubble which is just as dangerous as the one in 2005-2006 and which has been fueled mostly by borrowed money which tends to suddenly become scarce during an economic downturn.</span></div><span style="color: white;"><br style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;" /></span><span style="color: white;"><br /></span><div style="letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: white;">Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, COPX, GDX, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, EPU, TUR, SILJ, SOIL, EPHE, and THD. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in late 2017 or in 2018. The Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, recently trading at their lowest levels in 2-1/2 years. Small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. Confirmation of an impending end to the wildly popular deflation trade has been the notable decline for high-yielding shares since they had mostly achieved all-time peaks in January 2015, including utilities (XLU), REITs (IYR), and U.S. Treasuries (TLT).</span></div>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-84490150441013056522016-01-26T19:26:00.003-08:002016-01-26T19:26:52.749-08:00"In the short run, the market is a voting machine, but in the long run it is a weighing machine." --Benjamin Graham<a href="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="182" /></a><b>ALL ASSETS WILL CONTINUE TO SWING TO IRRATIONAL EXTREMES (January 26, 2016): </b>As Benjamin Graham notably stated in the above quote, in the short run the market is driven by investors who will be especially eager to purchase trendy assets near tops and to sell unpopular assets near bottoms. In the long run, the most undervalued assets will climb the most while the most overpriced ones will suffer the greatest percentage losses. This is evidenced by the all-time record outflows from U.S. equity index funds during the first quarter of 2009, and all-time record inflows into most of these funds during 2014-2015. Naturally, this means that most investors were selling the S&amp;P 500 around 800 or below, while buying it near 2000 or above. This is true of virtually all sectors: you can see huge outflows from U.S. Treasury funds in late 2010 and early 2011 the last time they were completing a multi-year bottoming pattern, and all-time record inflows into the same funds in late 2014 and early 2015 when they were peaking. It will always be this way, because investors will always want to own whichever assets have already enjoyed the most extended uptrends and are thus maximally vulnerable to a significant drop to reach fair value, while they will flee those assets which have suffered the most severe and long-lasting bear markets and are thus the most likely to rebound strongly.<br /><br />If we look at the state of the global financial markets, we can see that there have already been tentative and not-so-tentative moves toward fair value for those securities which had been among the most popular investor favorites of 2015. Apparently "unstoppable" names including the "fang" four, Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google/Alphabet (GOOG) have been among the biggest losers. Even these have rebounded in recent days, indicating that investors aren't willing yet to give up on their darlings even if they are barely profitable and have irrationally high price-earnings ratios. Some of the most undervalued emerging markets around the world, including Russia (RSX) where price-earnings ratios had dropped to an average between four and five, were also affected by the selloff as many investors dumped everything which is easy to do on the internet, only questioning their rash decisions later. In the short run, panic usually leads to a partial recovery, but the U.S. equity markets aren't going to go back to new all-time highs. Small-cap shares had outperformed from March 2009 through March 2014 and have since notably underperformed their large-cap counterparts, which historically has almost always been followed by a severe bear market. 2016 isn't likely to be either the horrible year which some are anticipating for U.S. equity indices, nor is it likely to be flat like 2015. It will be a moderate down year, with the bear market accelerating as usual in its final months which will likely occur in 2017 or 2018 when we could go below the deep nadirs of March 2009.<br /><br />Among the least popular assets today are shares of companies which produce commodities or are located in emerging markets. Some shares fit into both categories and are unusually undervalued. Even the highest-quality names in these sectors have mostly been devastated, because investors have concluded that they only move in one direction which is lower. It is the opposite of a bubble, which interestingly has no word in the English language to express it precisely. The increasingly optimistic expectation of continued gains for the U.S. dollar, which had been especially strong until the middle of March 2015 and has mostly moved sideways since then, is probably misplaced partly because it is such a popular bet with a recent all-time record total of speculative bets on a higher greenback, along with unusually strong commercial accumulation of nearly all other global currencies. Commercials, or insiders who trade currencies for a living as part of their job, have been especially eager to buy the Canadian dollar, with aggressive accumulation of other currencies including the Australian dollar and the Mexican peso. It's not that they necessarily know something that others don't, but that they aren't nearly as easily swayed by media coverage of an "unstoppable" U.S. dollar and are much more concerned with the fundamental facts on the ground.<br /><br />One asset which has barely been discussed as being overvalued is real estate in many parts of the world. As recently as 2011, there were many neighborhoods in U.S. states including Florida, Arizona, and Nevada where the ratio of housing prices to household incomes was less than 1.5 to 1. Today, there are cities including San Francisco, Vancouver, Tel Aviv, and others where some neighborhoods have ratios which exceed 10 to 1. As with all other assets, real estate prices which appear extreme can become even more extreme, but eventually fair value will reign and prices will have to revert toward their normal levels of 3:1 which have prevailed at least since the time of Julius Caesar. The percentage declines implied by these losses will shock those who are residents of these and many other global cities. As with everything else in the financial world, until it has happened almost no one can imagine it occurring, and after it happens everyone will say how obvious it had been that prices would have to collapse. This is part of a human tendency to repeatedly project the recent past into the indefinite future, even when making such an assumption is inherently illogical.<br /><br />For the past two decades, perhaps because of the existence of the internet, the financial markets have swung to much more frequent extremes than they had done for the previous several decades. The internet allows people to get and to act upon information rapidly, which is both a blessing and a curse. For most people, it is unfortunate that they can find out everything so fast, because this causes their emotions to get ahead of their brains. If you hear a stream of bad news, you will be more likely to take an action which you wouldn't likely have done if you had more time to think it over. I know people who have literally sold everything in their brokerage accounts within minutes because they were able to do so and because they were responding to news reports or listening to financial TV radio or television. If it is March 6, 2009 and you hear an incredibly negative U.S. employment report, you are likely to place sell orders even before the market has opened, as many did on that day when the S&amp;P 500 completed its historic bottom at 666.79. Throughout almost all of 2014 and 2015, you heard almost entirely optimistic forecasts of future U.S. stock market performance which encouraged many to buy near their most inflated levels and which dissuaded many from selling U.S. assets at clearly overpriced levels. The same will happen with real estate: people aren't going to consider seriously selling until after prices have already slumped and houses are trading well below their asking prices, instead of above their asking prices as is currently the case in the most popular areas.<br /><br />Prices which have strayed far from fair value, and then regress to fair value, rarely stop there. Whatever had been absurdly overvalued usually ends up becoming ridiculously undervalued and vice versa. This makes it emotionally difficult to sell, because you will be tempted to reduce your holdings when they reach a level you know is too high, and then if you don't sell you will see prices climb more and more and eventually you won't be able to sell at any price because you have received so much positive psychological feedback for doing nothing. Similarly, if you are considering buying something which is blatantly undervalued, but you do nothing and it gets even cheaper, then you won't be able to buy no matter how low it goes because you will have told yourself a dozen or more times how brilliant you were by waiting longer. This is a major reason why even the most experienced investors can rarely bring themselves to buy low or to sell high, because they were rewarded for not acting earlier.<br /><br />As usual, it makes sense to gradually buy a little of whatever is the most below fair value, while gradually selling whatever has surged far above fair value. In the short run you will almost always feel foolish as extreme trends tend to become even more extreme, but eventually everything will regress toward the mean and usually beyond the mean by an amount which is roughly proportional to the extent which it had been illogically pushed in the opposite direction. It is like a pendulum, which will move most violently away from a point which is the farthest away from equilibrium.<br /><br />Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, COPX, GDX, HDGE, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in late 2017 or early 2018. The Russell 2000 Index and its funds including IWM had handily outperformed the S&amp;P 500 from March 2009 through March 2014, and have subsequently dramatically underperformed, recently trading at their lowest levels in 2-1/2-years. Small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes. Confirmation of an impending end to the wildly popular deflation trade has been the notable decline for high-yielding shares since they had mostly achieved all-time peaks in January 2015, including utilities (XLU), REITs (IYR), and U.S. Treasuries (TLT).TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-54108587346787634962016-01-06T07:00:00.001-08:002016-01-06T07:00:15.656-08:00"I'm living so far beyond my income that we may almost be said to be living apart." --e e cummings<a href="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>FAIR VALUE, LIKE A RELIABLE BUT TARDY GUEST, IS ALWAYS LATE AND ALWAYS ARRIVES (January 6, 2016):</b> Many investors like to repeat John Maynard Keynes' overquoted quip about how the market can remain irrational longer than you can remain solvent. There are numerous problems with this saying, especially when taken out of context, since as long as you don't use margin you should always remain solvent. Those who go overboard with investing, as with anything else in life, will sometimes be rewarded in the short run but will inevitably fail in the long run. Those who bet on extremes becoming more extreme will similarly often prosper for some unknown period of time, but will eventually lose in the end because all assets eventually revisit fair value. After doing so, whatever had been previously wildly trendy and overvalued usually ends up becoming roughly equally despised and underpriced. Thus, if you can consistently buy gradually into whatever has become the greatest percentage below its fair value, and sell whatever has become the most stretched above its fair value, you will have a method which will be highly successful in the long run. It will also be consistently unpopular for others to follow, because you will be buying near the end of an extended bear market when everyone is gloomy and you will be selling anything when its recent outperformance encourages almost everyone to anticipate indefinite additional future gains.<br /><br />If we look at U.S. equity indices through the decades, there is a pattern in which nearly all bear markets and especially the most severe ones often begin with underperformance by thousands of small-cap shares. IWM tracks the Russell 2000 which represents U.S. companies 1001 through 3000 by market capitalization. IWM moved above 120 in early March 2014, having enjoyed a powerful bull market for just about exactly five years. Since then, it has fluctuated in both directions and briefly set a new peak in June 2015, but is now trading below 120. Most investors are unaware of this development, but ignorance is certainly not bliss as this persistent underperformance by small-cap U.S. equities relative to their large-cap counterparts is classically how bull markets transition to bear markets. Until nearly the end of 2015, investors responded to this divergence by crowding increasingly intensely into fewer and fewer advancing securities--much as they had previously done in years including 1929, 1972, and other periods when buying U.S. stocks was especially popular and ultimately disastrous. Even in 2007, small-cap U.S. indices peaked in the spring and early summer while many of the most popular names continued to climb until almost the end of that year.<br /><br />If investors believe they can remain ahead of the game by shifting from small caps to large caps, it is similar to switching into a first-class cabin on the Titanic instead of heading for a lifeboat. You will enjoy fine luxury for awhile, but in the end you won't survive. Those who have been buying the "fang" stocks (FB, AMZN, NFLX, GOOG) did wonderfully in recent months, but will end up in the poorhouse because wildly overvalued and trendy names in each generation end up just like the "Nifty Fifty" did during 1973-1974, collapsing far worse than the broader market during a sustained downturn. Already in 2016 we are getting a taste of what is in store for the next two years or so for what had been the most popular securities of 2015. This is appropriate, since the high-dividend favorites of 2014 including utilities (XLU), REITs (IYR), and U.S. Treasuries (TLT) slumped throughout most of 2015 after having briefly climbed to even more overvalued peaks in January 2015.<br /><br />If money is coming out of nearly all of these former investor favorites, where is it going to go? Real estate has also become irrationally overvalued and will eventually suffer the same fate as Netflix and Amazon. Even the relatively steady S&amp;P 500 Index has been repeatedly unable to set new all-time highs since it had topped out on May 20, 2015. Investors have been continuing to abandon the least popular sectors of recent years, making all-time record outflows from nearly all assets involved with commodity production and emerging markets. However, even the worst bear markets end eventually, and since they represent a high percentage of the bargains which are currently available, they will ultimately rebound enough to attract the attention of momentum players and many others who don't like to buy into the cheapest prices but wait until they observe that a recovery has been "confirmed." Of course there is no such thing as true confirmation, since anything can rise or fall at any time. However, whenever any asset has become so cheap that it could double or triple and still be below fair value, then it will often behave in a subsequent bull market by being among the top performers and eventually becoming as irrationally overvalued as it had been previously undervalued. It works the other way too, so that the most popular assets often become the least popular a few years later.<br /><br />The U.S. dollar is a classic example of a wildly loved currency that climbed to its highest point in 2015 since April 2003, but has been unable to remain above its highs from March 2015. The U.S. dollar index has repeatedly climbed toward or above 100 and has failed to hold above that level. Investors have flooded into bets on a higher greenback while sentiment has rarely been more bullish, but market behavior hasn't responded by staging an appropriate rally extension. Instead, resistance keeps reappearing and investors keep getting more optimistic. This is how major tops are formed. Instead of rising further to 110 or 120 as most observers currently expect, an equal move the opposite way to 90 and then 80 is a far more likely scenario for the U.S. dollar index in 2016 and perhaps the early months of 2017. Even mentioning to someone that you are anticipating a significantly lower U.S. dollar will get people seriously questioning your sanity, which thereby makes it far more likely to occur.<br /><br />Ultimately, whatever is last shall be first and vice versa. Expect to see the least popular assets of recent years finally enjoying a year or more in the sunshine of strong bull markets, while the most sought-after assets of recent years will severely disappoint holders with losses generally exceeding half. Probably most investors can't imagine their Nasdaq favorites or San Francisco/Vancouver/Tel Aviv real estate losing more than half their current valuations, but that is what is going to happen. Fair value seems elusive and unachievable, until it is inevitably achieved and usually far surpassed in the opposite direction.<br /><br />Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, HDGE, COPX, GDX, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring in late 2017 or early 2018. The Russell 2000 Index and its funds including IWM are trading below their levels from the first week of March 2014; small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.<br /><br /><span style="color: orange;"><b>Question: Do you plan to take advantage of the impending real estate collapse? If so, how? Please email answers to <a href="mailto:sjkaplan@truecontrarian.com">sjkaplan@truecontrarian.com</a>.</b></span>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-5066029036447389592015-11-24T11:42:00.003-08:002015-11-24T11:42:42.408-08:00"I am not worried about the deficit. It is big enough to take care of itself." --Ronald Reagan, March 24, 1984<a href="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>STOPPING STOPS (November 24, 2015): </b>The following news article appeared earlier this month:<br /><br /><li><a href="http://www.marketwatch.com/story/nyse-joining-nasdaq-in-eliminating-stop-orders-2015-11-18?dist=afterbell" target="_blank">NYSE Joining Nasdaq in Eliminating Stop Orders</a></li><br /><br />Here is a continuing blog on this ban, which oddly also applies to good-till-canceled (GTC) orders starting on February 26, 2016:<br /><br /><li><a href="http://216.228.225.62/NewSocialize/forums/p/354901/3694353.aspx" target="_blank">NYSE to End GTC and "Stop Orders"</a></li><br /><br />Stop orders still exist on many other exchanges in the United States and elsewhere, so I think it remains important to discuss why they are so dangerous even though they seem so safe. I will also give my opinion about why good-till-canceled orders are important and why I hope that several U.S. and other exchanges will change their plans to eliminate them.<br /><br />In the financial markets, no one likes risk. Therefore, all kinds of methods have been designed in an attempt to minimize it. One method which sounds good is to place a stop-loss order after you have bought anything. If you have purchased a particular security at a price of 20, and you place a stop-loss order at 19, then you believe that you won't lose more than 5% on that particular trade. Your expectation is that once the price drops to 19, you will sell it and thus avoid potential future losses.<br /><br />The reason why this is appealing is that it creates the internal illusion that you are controlling your risk. Consider the fate of two gamblers, each of whom decides to play roulette continuously from 8 a.m. to noon, then to take a one-hour break for lunch, and then to resume play from 1 p.m. to 5 p.m. Gambler #1 remains at the same roulette wheel all day, since he knows all of the people there and enjoys chatting with them as he is betting. Gambler #2 has a rule: whenever she is behind by more than fifty dollars at any given roulette wheel, she immediately moves to the next roulette wheel. Throughout the day, both make bets of equal sizes, both make the same kinds of bets, and both also make the same total number of bets. Which gambler is likely to have the best result at the end of the day?<br /><br />If you are reasonably knowledgeable about probability, then you know that both gamblers have the same expected average outcome. They are making the same number of equal-sized and equal-odds bets, and therefore it doesn't matter which roulette wheel they choose or how often they switch from one to another. The average outcome can be precisely computed with this kind of information. The actual results can very tremendously from this average, so both gamblers are likely to end up with very different net results--but it will have nothing to do with the strategy which they have implemented. Because the results are entirely due to chance, there will be no difference in the long run. The gambler who continued to change from one wheel to another may tell herself that she was limiting her losses as a result of her method, but there was actually no such effect.<br /><br />The same would be true in theory if the financial markets behaved continuously--in other words, if prices smoothly moved up or down at any given instant in time. One person may feel emotionally more comfortable closing out his position whenever he is losing 5% on any given trade, so he always places a stop-loss order 5% below his purchase price. However, if he immediately takes the money from that sale and purchases another security of equal volatility, then the long-term result will be exactly the same as if he had done nothing. At any given time, he is just as fully invested as the person who simply buys and holds on, and therefore whether he restricts his loss to a particular percentage or not, the combined effect will be the same. If there is a long losing streak for both kinds of participants, then one person will lose 5% on each of a dozen different trades while the other investor loses 60% on a single trade. Either way, the actual expected outcome is identical in both cases.<br /><br />In the real world, there are other factors to be considered. Traders who frequently buy and sell will usually have to pay higher commissions than those who trade less frequently. In countries including the United States and Australia, but not in Canada, there are favorable long-term capital gains tax rates which are about half the short-term rates and which only apply to positions which have been open for more than a year (one year and one day or more in the U.S.; one year or more in Australia). Therefore, in the long run, the difference in strategy will be unfavorable to the person who frequently uses stop-loss orders and other methods which encourage frequent trading, because the commissions will usually be higher and the total taxes owed will also be greater.<br /><br />What is much more serious than these problems is the fact that the financial markets don't behave continuously. Price movements often make sudden lurches both higher and lower. These are not necessarily due to any rational behavior, but because humans will emotionally crowd into a security which has suddenly announced positive news and will panic out of the stock market when there has been a recent sharp correction and everyone decides nearly simultaneously that they want to get out. The most common time for a sudden slump tends to be on Monday morning following a downtrend, because many people will brood in an atmosphere of media gloom and doom throughout the weekend and will often place market sell orders. Those who have placed stops will end up finding that their stop-loss orders combined with market sell orders will trigger a domino effect, thereby causing lower-priced stop-loss orders to be triggered and new market sell orders to occur from panicked holders who don't understand what is happening and prefer to sell first and ask questions later.<br /><br />You may be thinking that this only occurs for the most illiquid and infrequently traded securities, but shortly after the open on Monday, August 24, 2015, it happened for hundreds of popular exchange-traded and many closed-end funds. Yesterday, I was looking at a chart of various sectors and discovered this behavior for First Trust Consumer Staples AlphaDEX Fund (FXG):<br /><br /><div align="center"><img border="0" src="http://truecontrarian.com/fxg151124.png" /></div><br />Some investors in FXG must have decided that it would be a good idea to place stop-loss orders. Some likely did so in the low 40s or the high 30s, while others placed orders closer to 35 or 30. On August 24, 2015, the price opened below 40 which caused some people to simply panic and place market sell orders, while meanwhile those who had placed stop-loss orders were already having their orders processed. In the rapid plunge, even those who had placed stops in the low 30s or high 20s ended up selling in some cases below 28. As happens with all rapid collapses, eventually the number of limit buy orders--many of which were good-till-canceled--finally overwhelmed the combined selling of market orders and stop-loss orders. Once that happened, the vacuum reversed and incredibly quickly FXG surged into the high 30s and then the low 40s once again. This was wonderful for those who bought it in the high 20s, but for those who were stopped out at 29 or 28, they had to decide whether to get back in at 41 or 42 and thus pay perhaps 40% more for this fund than they had just sold it for a short while earlier.<br /><br />You might think that I intentionally chose FXG because it was the most extreme example of fund behavior that day, but actually I was just reviewing the recent behavior of various market sectors and this one caught my attention. FXG was not even on the lists of the biggest deviations from net asset value which were described in the following three links:<br /><br /><li><a href="http://seekingalpha.com/article/3474096-5-lessons-from-the-s-and-p-500-market-crash-for-etf-portfolios?ifp=1" target="_blank">5 Lessons from the S&amp;P 500 Market Crash for ETF Portfolios</a></li><br /><br /><li><a href="https://www.google.com/?gws_rd=ssl#q=%22inner+workings+of+exchange-traded+funds%22" target="_blank">Market Plunge Provides Harsh Lessons for ETF Investors</a></li><br /><br /><li><a href="http://seekingalpha.com/article/3477446-the-great-etf-crash-of-2015?ifp=1" target="_blank">The Great ETF Crash of 2015</a></li><br /><br />From the above links, you can see that some funds which are much more diversified, more liquid, with greater total assets, and with much higher daily volumes than the one I cited ended up experiencing even larger percentage fluctuations shortly after the open on August 24, 2015. Funds like iShares Select Dividend ETF (DVY) and Guggenheim S&amp;P 500 Equal Weight ETF (RSP) were especially volatile early that morning, and are considered by most analysts to be among the most predictable and consistent long-term U.S. exchange-traded fund performers. The most liquid exchange-traded funds including Power Shares QQQ Trust Series 1 (QQQ) and iShares S&amp;P 100 ETF (OEF) experienced notably less intraday volatility than the funds listed above, but even these suffered dramatic plunges following the open on August 24, 2015.<br /><br />Of the three links above, the one at the bottom is perhaps the most useful because it lists those which had the largest percentage dislocations from net asset value. It should be made clear that the actual assets which constitute these exchange-traded funds had also fluctuated much more than they would on a normal trading day, but the real issue was how steeply many funds' discounts to net asset value soared and then collapsed within minutes and sometimes within seconds. If you were fully prepared in advance to take advantage of these kinds of mispricings, if you hired others to watch for you, and all of you were doing nothing but scanning multiple monitors with one eye while placing trades with the other, then you still would have had extreme difficulty in placing orders fast enough to be executed near the most favorable prices. Only those who had placed limit orders in advance would have received the most favorable fills.<br /><br />The above behavior is the primary reason why exchanges are progressively banning the use of stop-loss orders. Panics and sharp corrections will periodically happen, and those who use these orders will get burned and will complain the most to their brokers and to the exchanges. With the introduction of the internet, stop-loss orders have become far more popular than they had been in pre-internet times. If only a few traders are using any strategy, stops or otherwise, then it will have less of an impact. If many are placing stop-loss orders and they are triggered in a cascade, then paradoxically the wish to limit losses ends up ensuring even larger losses.<br /><br />There are other drawbacks with using stop-loss orders. Most traders place these near similar prices, generally close to round numbers to make them easier to remember. As a result, securities will often slump just enough to knock out these stops and will thereafter rebound rapidly. Those who were stopped out then have to decide whether to buy back their positions at significantly higher prices, or to buy something else instead which might then suffer a similar fate. In many markets, floor traders and others who pay for the information can actually see others' stops, so they know exactly when they can temporarily place some sell orders just to trigger a cascade of stops, thereafter buying back their positions at lower prices. This happens routinely with some securities and more choppily with others. In addition to this behavior occurring frequently with exchange-traded and closed-end funds, it happens with individual securities on various occasions. If a stock is about to double from 22 to 44, it will sometimes briefly slide below 20 to knock out sell stops which are often placed close to such a round number. I have seen instances in which there was a rapid price drop that was reversed within seconds, so that it lasted just long enough to knock out sell stops. It also happens the other way for securities which are popular with short sellers; there will be a temporary short squeeze where the price will rise just enough to knock out buy stops, cause a rapid cascade of buying to reach a price which will force out some short sellers who are using margin, and will then collapse back to the original price shortly thereafter. Several years ago there was a particularly spectacular instance of this with Volkswagen which is a highly liquid stock and which therefore wasn't expected to behave in such a manner by most short sellers at that time.<br /><br />Good-till-canceled orders are most popular with highly disciplined investors who will construct ladders of GTC orders to gradually purchase a security into weakness whenever it unexpectedly plunges in price as I often recommend near the end of any extended bear market. Because they help to balance the market on both ends and to prevent extremes from becoming even more ridiculously extreme, it is puzzling why some exchanges are considering removing them. Perhaps some traders had placed orders and forgot about them, and then when they were filled several months later these folks ended up complaining that they hadn't intended for their orders to persist for so long. Possibly there will be a compromise where instead of being truly good-till-canceled they will be valid for six months or some other period of time as many brokers already do to control such orders. The biggest advantage of GTC orders is that they permit gradual rebalancing of portfolios to take advantage of the best bargains and to sell the trendiest holdings while acting in small steps. It isn't practical or logical for traders to have to re-enter dozens or hundreds of orders every single day. Since good-till-canceled buy orders placed well below the bid are the primary source of support to prevent even worse intraday plunges, and since GTC orders placed well above the ask price are an important source of selling to keep some equilibrium during a euphoric uptrend, the exchange should be encouraging greater use of good-till-canceled orders instead of planning to get rid of them. As bad as stop-loss orders are in accelerating the most irrational behavior, GTC orders used properly are among the best kinds of market balancing which exist. I am therefore campaigning to get the NYSE, Nasdaq, BATS, and other exchanges to change their plans to remove good-till-canceled orders which the NYSE wants to eliminate starting on February 26, 2016.<br /><br />A useful corollary is that there is no magic bullet to reducing risk. Being diversified helps, but sometimes numerous assets will rise or fall together even if they may seem to be unrelated. Whether it makes sense to have a combination of historically overvalued assets is also questionable, since assets which are significantly above fair value tend to eventually become roughly equally undervalued. Buying lots of small quantities of undervalued securities, especially those which historically have the least correlation with each other, is probably the best long-term approach and is used by a number of long-term fund managers including Howard Marks. In the end, the only real protection against loss is having a lot of money in safe time deposits like bank accounts which are derided when they are paying one percent interest or less but which are the only true protection against market fluctuations. The main problem with gimmicks like stop-loss orders and various kinds of technical methods is that they can create the illusion of stability, safety, and loss aversion when it doesn't exist. This can psychologically encourage some traders to take dangerous risks which aren't appreciated until we have days like August 24, 2015. If you are taking on too much risk, then you may end up dumping assets which are underperforming, or not purchasing bargains which you know to be compelling, or otherwise becoming emotionally influenced in your trading decisions. One useful test is what I call the thousand-dollar test: if you only had a thousand dollars or less in any given security instead of whatever you have now, would you trade it differently? If so, then you are taking on too much risk no matter what you think your risk tolerance is. The level which would make you uncomfortable is entirely due to psychological factors, so it will vary considerably from one person to another. I once did an experiment where I asked people before playing Monopoly to give me twenty dollars for dinner; I gave each person five dollars back and pointed out that since they had 1500 play dollars in the game then these represented fifteen actual dollars. Even at a penny per dollar, players ended up making absurdly poor decisions such as not buying enough property or avoiding trades because they kept fretting about the "real money" they would be spending. Eventually I gave everyone back their original money because they became so emotional about the progress of the game.<br /><br />Disclosure: Whenever they have appeared to be especially depressed, I have been buying the shares of funds which invest either in emerging-market assets or in the shares of commodity producers, since I believe these are among the two most undervalued sectors in a world where real estate and U.S. equity indices remain dangerously overvalued. As the extremely popular U.S. dollar stuns investors by suffering a bear market instead of continued gains as almost everyone is expecting, this will lead to a major upward revision in global inflationary expectations. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, HDGE, COPX, GDX, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. I expect the S&amp;P 500 to eventually lose roughly two thirds of its May 20, 2015 peak valuation of 2134.72, with its next bear-market bottom perhaps occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM had only modestly surpassed their highs from the first week of March 2014 and are currently trading below those levels; small-cap U.S. equities typically lead the entire U.S. equity market lower as they have done in past decades including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-1038050787787000002015-11-11T14:11:00.001-08:002015-11-11T14:11:22.982-08:00"Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery." --Charles Dickens<b>LOST IN ROTATION (November 11, 2015):</b> Imagine if a weather forecaster were to announce in August that because the usual cooling that month hadn't occurred and temperatures were even hotter than in July, we must be making a decisive upside breakout and we won't need cold-weather clothing for several more years. Or imagine an astronomer announcing that we won't have the usual appearance of Halley's Comet because the core nature of the universe which had been established over billions of years has permanently changed during the past decade. While most cyclical phenomena are accepted as an inherent part of life, in the financial markets there are a surprising number of analysts, advisors, and others who refuse to acknowledge that there is a rotation which has existed for thousands of years and will continue to exist as long as humans are populating planet Earth. Each time we have an economic boom, many believe that we are not going to experience another recession--or that somehow an especially powerful or extended era of prosperity will magically be followed by an especially mild downturn. Pointing to history carries a lot of weight in some fields of endeavor, but in the financial markets it doesn't exert much impact because so many people will always think that "it's different this time." In 2000, many believed that technology shares could only go up because we never had the internet before, and then the Nasdaq suffered its worst-ever percentage decline of more than three fourths of its value. In early 2009, perhaps even more people were convinced that global stock markets would take years to even moderately rebound, because we had never suffered a subprime asset collapse before. Looking back at previous centuries, many pointed to canals, railroads, and other phenomena as evidence that the world had completely changed, and therefore well-established patterns--the earliest known writing consists of a sequence of grain trades--had become obsolete and had to be replaced by an entirely different set of theories. In the end, the strongest and most extended bull and bear markets will continue to be followed by the most powerful moves in the opposite direction, just as had been the case a decade or a century ago.<br /><br />We are currently in the process of another typical rotation from a bull market for U.S. equity indices including the Russell 2000 (IWM), the S&amp;P 500 (SPY), the Nasdaq 100 Trust (QQQ), and the Dow Jones Industrial Average (DIA) into a bear market for the same assets. One common sign that a transition has occurred is when the smallest stocks as a group have been struggling to achieve historic peaks, while the largest stocks have been able to do so. QQQ reached an intraday top of 115.47 on November 4, 2015, which it had not previously touched since March 28, 2000 and which in dividend-adjusted terms had been a new all-time high if you don't adjust for inflation. However, the highest that IWM could get in recent weeks was 119.36 on November 6, 2015, which was considerably below its all-time top of 129.10 from June 24, 2015. Currently, IWM is trading below its highs from the first week of March 2014 which was more than 20 months ago, indicating that it has actually been underperforming for an extended period of time. This kind of underperformance by thousands of small U.S. companies had also occurred in 2007 as the 2007-2009 bear market was beginning, and had been a key feature of the U.S. stock market in 1971-1972 prior to the 1973-1974 bear market. The same had been true in the late 1920s prior to the worst bear market in U.S. financial history, and on several occasions in the 1800s. What is fascinating is not only how consistently this pattern tends to appear, but how investors behave each time. You would expect investors to look back at the past and say to themselves, "A common pattern of lagging small-stock behavior is probably signaling that we are transitioning to a bear market for U.S. equities. So it makes sense to gradually sell into all rallies." Instead, most investors tell themselves, "The past doesn't matter, because we never had (canals) (railroads) (automobiles) (semiconductors) (the internet) before. So a completely different set of rules are in force." Technical traders insist, "Since larger stocks are continuing to outperform, continue to sell small stocks and move the money into large-cap U.S. equities." Sometimes this technical pattern becomes so widespread, as in January 1973, that an astonishing percentage of investors end up crowding into a narrower and narrower set of stocks. To a less dramatic extent, but no less dangerously, this occurred near the end of 2007 and has been happening in recent months. It is no coincidence that Marc Andreessen, a founder of Facebook (FB), recently sold nearly half of his total position in that company which he had held throughout the bull market. Insiders in many large-cap names have accelerated their selling relative to buying in recent weeks, in order to take advantage of many investors making a rotation but going about it in a dangerous way. Shifting from large-cap to small-cap U.S. equities is like noticing that some first-class passengers on the Titanic have decided to abandon ship; instead of finding out why, you happily move into their vacant deluxe cabin. Investor inflows into large-cap U.S. equity funds have been especially intense in recent weeks, with many of them concluding that we had already experienced our correction for 2015 and that it will be sunshine and chocolate cookies from now on. Whenever too many people are expecting smooth sailing, watch out for rough seas.<br /><br />A common rotational pattern during the early stages of a bear market is for inflationary expectations to increase. This was clearly evident in 2007-2008, 2000-2001, 1978-1980, 1972-1974, 1936-1937, 1928-1929, and during many other previous transitions to bear markets. Any economic expansion which lasts more than a few years will eventually lead to the ability of companies to raise prices and for workers to demand higher wages to allow them to share in the economy's prosperity. According to U.S. government data contained in the employment report released on Friday, November 6, 2015, average U.S. hourly wages have been growing at 2.5% annualized which is the fastest pace of increase since 2009. Other signs of inflation have been more difficult to find due to extended bear markets for most commodities, but historically this is the time when commodities and the shares of their producers will tend to strongly outperform other assets. It is highly likely that many investors who had money in commodity producers or emerging markets in recent years ended up selling them and using the money to buy U.S. equity funds--not because it was logical to sell the most undervalued securities to buy the most overvalued ones, but because emotionally people hate holding onto anything which has been in an extended bear market and love to own anything which has enjoyed an extended bull market, which in this case had become among the lengthiest and strongest bull markets in U.S. history. While there have been problems with subpar growth and political turmoil in many emerging markets--with the former usually contributing significantly to the latter, since prospering economies will overlook political shenanigans--the relative price-earnings ratios and other measures of valuation are far out of line with what they should be based upon corporate profit growth. It isn't logical that U.S. equities should still be more than three times as expensive as they had been at their lows in early March 2009, while many emerging-market bourses are trading near or below their lowest levels of the previous recession--and in several countries even lower than the recession before that. Especially undervalued bourses include those in Latin America (ILF), including Brazil (EWZ) and Colombia (GXG), along with many African (AFK) economies including Nigeria (NGE) and others near and south of the equator such as Australia (EWA) and South Africa (EZA).<br /><br />The real reason that investors haven't been accumulating the most undervalued securities is that most people are afraid to buy anything which has suffered an especially severe and lengthy downturn. They will usually change their mind once there has been a significant percentage rebound such as 50% for some investors and 100% for others. In addition, as long as they hold out hope that U.S. equity indices will remain in uptrends, they will be reluctant to sell something with which they are very familiar in order to buy something with which they intuitively feel less comfortable. Nonetheless, during nearly all previous transitions from a bull to a bear market, investors eventually crowded into commodity producers and emerging markets, so what is really required is for this process to reach a more advanced stage where investors feel that they are missing out on a fantastic opportunity by not participating along with their friends who have recently been making money in those assets. Eventually, fear about buying something which has been in a crushing downtrend is replaced by a greater concern of having a major bull market in something passing them by without their being part of it. Rotations begin with an inevitable shifting out of the most overpriced assets into the most underpriced securities, and usually ends with the previous big losers becoming the strongest percentage winners. Funds which had been especially unpopular and have likely completed or will soon complete historic bottoms include silver mining shares (SIL), copper mining shares (COPX), coal mining companies (KOL), uranium mining companies (URA), and natural gas producers (FCG).<br /><br />Other events tend to happen when this transition is underway. As inflationary expectations increase, assets which benefit from deflation will notably underperform. These primarily include high-dividend shares of all kinds, including utilities (XLU), REITs (IYR), long-dated U.S. Treasuries (TLT, VUSTX), and preferred stocks (SPFF). The fact that all of the above sectors have been in downtrends is probably not a coincidence, since they will typically begin bear markets prior to broader-based U.S. equity funds as they had done in each of the past several transitions to bear markets. I have seen a lot of commentary about how "there is no sign of rising inflation anywhere," but the behavior of the above equity groups serves as a compelling omen of what is most likely to occur.<br /><br />It is important to note that since the financial markets have been and always will be cyclical, a period of rising inflationary expectations will not last indefinitely. In a typical transition, U.S. equity indices are in a bear market but contrary to popular perception rarely end up crashing. Instead, there is a sequence of several or more corrections, each one which is followed by a sufficiently convincing rebound to discourage most investors from selling. A pattern of several lower highs is thus established. At the same time, high-dividend sectors including U.S. Treasuries continue in their bear markets, while previous losers including commodity producers and emerging markets will often transform themselves from the least popular to the trendiest assets. Whenever Treasuries are least desired and commodities are back in favor, you will see projections by the same analysts who had been simultaneously forecasting gold (GLD) at 1000 U.S. dollars per troy ounce or lower and crude oil (USO) at 30 U.S. dollars per barrel or lower competing with each other to give the most aggressive upside targets for commodity prices. Whenever this happens, it usually makes sense to gradually sell the shares of commodity producers and emerging markets to purchase very unpopular U.S. Treasuries especially on the longer end of the curve and particularly if Treasuries are trading at their lowest points in several years or more. The reason is that, during any U.S. equity bear market, the first 70-80% of the transition is one where many equity sectors underperform while a minority of sectors are dramatically surging higher. In the final 20%-30% of the bear market, it is usually the case that almost all risk assets will plummet simultaneously--not necessarily by the same percentages, but with nearly all of them suffering substantial percentage losses. During this collapse phase of a bear market, among the few winners will tend to be funds like TLT, other long-dated U.S. Treasury securities, and not much else. Perhaps the second or plunging phase of the current bear market will begin at some point during 2017. During such a collapse, the risk-off behavior is so predominant that it is usually folly to try to pick the very few risk assets which will be climbing in price.<br /><br />Investors always want to know what is unknowable, which is how extended any given trend will become, how high or low any given asset will get, and when it will happen. The same people rarely respect even the best-established historic patterns, so that they believe that each time it is completely different from the past when it is almost always an approximate repeat. Therefore, it is like a horse race in which the selections which should be odds-on favorites instead end up sporting the odds of true dark horses with incredible long-shot payoffs. Most investors currently believe that broad-based U.S. equity indices will continue to outperform while commodity producers and emerging markets will continue to retreat, while the opposite is likely to prove true primarily because such behavior has almost always been the case for many decades. The world has certainly changed, but the financial markets tend to behave almost exactly the same.<br /><br />Disclosure: In August-September 2013, and at various points during 2014-2015, I have been buying the shares of emerging-market country funds whenever they have appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. I have also been accumulating HDGE whenever U.S. equity indices are near their peaks; HDGE is an actively-managed fund that sells short U.S. equities. I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, HDGE, COPX, GDX, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position to roughly 3% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG when insiders were unloading, but I repurchased FCG in recent months following its collapse of more than three fourths of its June 2014 peak because there had been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&amp;P 500 to eventually lose about two thirds of its May 2015 peak valuation, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM had only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (IWC) marginally surpassed its zenith from March 6, 2014. The S&amp;P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.<br /><br /><span style="color: orange;"><b>How do YOU personally handle being "lost in rotation"? &nbsp;Have you switched strategies or are you standing your ground?&nbsp;</b></span><br /><span style="color: orange;"><b><br /></b></span><span style="color: orange;"><b>EMAIL your answer to <a href="mailto:sjkaplan@truecontrarian.com">sjkaplan@truecontrarian.com&nbsp;</a></b></span>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-77432711664524585482015-11-01T05:40:00.001-08:002015-11-04T11:02:08.244-08:00"What is a cynic? A man who knows the price of everything and the value of nothing." --Oscar Wilde<a href="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>GOLDMAN SACHS IS WRONG; THE U.S. DOLLAR IS IN A DOWNTREND WHICH WILL ACCELERATE (October 30, 2015):</b> Goldman Sachs (GS) announced on Thursday, October 29, 2015 that the U.S. dollar would achieve parity with the euro before the end of 2015. Goldman Sachs is also bearish toward the currencies of commodity-country and emerging-market currencies including the Canadian and Australian dollars, expecting the loonie and aussie to retreat significantly versus the greenback during the next several months. Goldman Sachs believes that the price of crude oil will plummet to 20 U.S. dollars per barrel and that gold will slump below one thousand U.S. dollars per troy ounce. What the above outcomes all have in common is the anticipation of intensifying deflation and a surging greenback, along with continued declines for commodity prices. It is interesting to note how bullish Goldman Sachs was toward all of the above during the first half of 2008, just before they all plummeted by historic percentages within less than a year. More importantly than their track record, however, is the logic which is used by Goldman Sachs and many other analysts to justify their expectations for a stronger U.S. dollar and lower commodity valuations.<br /><br />One popular myth is that currencies with rising interest rates will outperform those with falling interest rates. If the U.S. Federal Reserve is considering raising the overnight lending rate, while the European Central Bank is considering lowering it, then supposedly this means a higher U.S. dollar versus the euro. However, it usually works the opposite way. Emerging-market currencies have among the highest interest rates in the world, and their currencies have slumped versus the greenback especially when their rates were ascending the most. Rate increases generally reflect an anticipated rise for inflation, and global investors tend to avoid countries with rising wholesale and retail inflation which will erode the value of their holdings. Therefore, it is often the countries where rates are declining that will attract the strongest worldwide inflows. Those emerging markets where interest rates have been slashed the most in recent weeks have generally enjoyed the most powerful rebounds in their currencies.<br /><br />One measure of purchasing power parity can be achieved by calculating how much it costs in U.S. dollars to buy a particular item which is virtually identical around the world. For example, a Big Mac at McDonald's (MCD) in one country is essentially indistinguishable from a Big Mac ordered in a McDonald's in a completely different continent. Therefore, you would expect their prices to be almost identical, but there are actually substantial differences in price in varying cities. Wherever the prices of Big Macs have been cheapest in past decades, the currencies later climbed higher; where the Big Macs were most expensive, the currencies retreated in price. This didn't always happen immediately, and sometimes the extremes first became even more extreme, but eventually there was some kind of global parity. Currently, the cheapest Big Macs are in emerging-market economies. Below-average prices can also be found in countries with high ratios of commodities to people including New Zealand, Australia, and Canada.<br /><br />Some emerging-market and commodity-country currencies recently slumped to their most depressed levels in history versus the U.S. dollar, while others fell to their lowest points in many years. In the middle of March 2015, the U.S. dollar index climbed to a 12-year top. Extremes can often become even more extreme, but a scan of brokerages and other institutions shows that nearly all of them are on the same side as Goldman Sachs even if their short-term forecasts are less drastic. Almost all of them are expecting a generally rising U.S. dollar, and almost all of them are also expecting lower prices for commodity-related assets including currencies of commodity-producing countries, the shares of commodity producers, and commodities themselves. Any nearly unanimous consensus generally proves to be wrong sooner or later, because everyone trades on the same side in anticipation of a particular outcome which thereby makes such an outcome much less likely to occur. For example, if nearly all futures traders are expecting a higher U.S. dollar, they will have already bought a large quantity of greenbacks. This leaves far fewer new potential buyers, while many who had bought U.S. dollars in anticipation of higher prices will be in position to sell them whenever they become disenchanted with their failure to behave as had been expected.<br /><br />There is an intuitive emotional tendency to project the recent past into the indefinite future, especially when recent behavior has remained generally consistent for an extended period of time. If there has been a bear market for several years or more, then one begins to take for granted that it will continue for several more years. Most emerging-market currencies and equity markets had peaked during or near April 2011, and therefore had been in bear markets for more than four years by the time that these assets completed historic bottoms during the past summer or early autumn. It is possible that some commodity-related assets haven't yet achieved their ultimate nadirs for the cycle, although their patterns consisting mostly of higher lows during the past several weeks tend to signal that their trends have already reversed. Looking at charts of natural gas producers (FCG), gold and silver mining companies (GDX, SIL, and GDXJ), and Latin American equities (ILF, EWZ, and GXG), these vary somewhat but all have in common that 1) they lost dramatic percentages since April 2011; 2) they reached multi-year, multi-decade, or all-time bottoms from July through September 2015; and 3) following their respective bottoms, they appear to have formed several higher lows in the kind of choppy trading with frequent corrections which tends to characterize the early months of any powerful bull market. Media and analysts' coverage has remained almost universally gloomy toward all of the above securities with very few agreeing that these and similar assets may have begun important bull markets. The most common explanation by many bearish analysts is that since those who are bullish have been wrong recently, they will continue to be wrong. Similar arguments would lead to not buying near the bottom for anything, because those who have been bullish will always have been recently "wrong" at any nadir.<br /><br />Because most U.S. equity indices have rebounded smartly in recent weeks, many investors and analysts have concluded that their corrections are over and that the next few years will enjoy frequent new all-time highs. I think this is a seriously flawed conclusion, since we have experienced classical divergences which generally indicate that we are already in a bear market. Fewer stocks have been able to accomplish new all-time highs than had been the case a half year ago, while indices of the smallest companies are still trading below their levels from early March 2014 which was more than 1-1/2 years ago. Just as in 2007-2009 or 2000-2002 or 1973-1974--or any past severe bear market--investors aren't worried about the possibility of the existence of a bear market, figuring that all corrections are good buying opportunities and that new all-time highs for the S&amp;P 500 (SPY), the Nasdaq (QQQ), and the Russell 2000 (IWM) must lie just around the corner. Thus, the vast majority of participants are convinced that the U.S. stock market is still rising and that the U.S. dollar is doing likewise, even though both have probably already begun important downtrends. There are many brokerages and analysts which have forecast the price of gold to drop by roughly 150 U.S. dollars per ounce or more, while almost none of them expect the gold price to rise by a similar amount. Whenever almost everyone is aligned on the same side of any trade, the opposite almost always occurs so that the majority of investors repeatedly end up losing money.<br /><br />Many media commentators and others misinterpreted the Fed's latest rate announcement. The Fed declared that they would decide at the next meeting about whether or not to raise the overnight lending rate--but nearly all analysts left out the second part of this statement which explicitly stated that they would only do so if inflation had reached or exceeded two percent. Regardless of what happens between now and December 2015, there are very few scenarios where the rates of inflation which are tracked by the Fed for this purpose could realistically surge to 2.0% or above. Therefore, the Fed isn't announcing that they might raise rates at the next meeting--they are telling you why they aren't going to do so! I didn't see a single media outlet explaining this in its proper detail.<br /><br />As a result, all of the deflationary forecasts by Goldman Sachs will prove to be as misguided as their inflationary predictions had been in 2008 and 2011. Gold (GLD) will rally instead of retreating to one thousand, crude oil (USO) will similarly climb, and nearly all other commodities including metals (XME) and energy assets (XLE) will recover half or more of their losses which they had suffered in recent years. Emerging-market assets (EEM), which had also experienced severe multi-year percentage declines, will enjoy analogous rebounds. The U.S. dollar (UUP), which is widely expected to resume its former uptrend, will instead retreat to a multi-year bottom versus most global currencies including the Canadian dollar (FXC) and the Australian dollar (FXA). I am less of a fan of the euro (FXE) or yen (FXY), but even these two popular currencies will move higher versus the U.S. dollar as investors become increasingly eager for alternatives to a sliding greenback for the remainder of 2015, probably for most or all of 2016, and perhaps into early 2017.<br /><br />Disclosure: In August-September 2013, and at various points during 2014-2015, I have been buying the shares of emerging-market country funds whenever they have appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. I have also been accumulating HDGE whenever U.S. equity indices are near their peaks; HDGE is an actively-managed fund that sells short U.S. equities. I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, HDGE, COPX, GDX, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position to roughly 3% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG when insiders were unloading, but I repurchased FCG in recent months following its collapse of more than three fourths of its June 2014 peak because there had been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&amp;P 500 to eventually lose about two thirds of its May 2015 peak valuation, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM had only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (IWC) marginally surpassed its zenith from March 6, 2014. The S&amp;P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.<br /><br /><b><span style="color: orange;">Do YOU engage with media from mainstream corporate sources such as Goldman Sachs, and if you do, how does the information you find factor into your overall opinions?</span></b><br /><span style="color: orange;"><b><br /></b><b>EMAIL<a href="mailto:sjkaplan@truecontrarian.com"> sjkaplan@truecontrarian.com</a> with your answer.&nbsp;</b></span>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-33117226813675747822015-10-21T12:36:00.000-07:002015-10-21T12:36:04.040-07:00"He who wishes to be rich in a day will be hanged in a year." --Leonardo da Vinci<a href="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>INVESTORS ARE FINALLY PUTTING THEIR CASH TO WORK, PRIMARILY INTO TWO CATEGORIES OF ASSETS (October 20, 2015): </b>The title of my previous posting was "investors have been selling but haven't yet decided what to buy." I had studied published fund flows and discovered that money had mostly gone out of equity and corporate bond funds into money market funds and bank accounts, but very little of that money had been shifted into other assets. I speculated that, as is typical in the early stages of any U.S. equity bear market, investors were nervous about a global stock-market decline, so their first reaction was to sell without buying anything with the money. I concluded that this decision not to buy anything was temporary, and that they would soon decide to make purchases which would mostly end up surprising many analysts. During the past few weeks, investors have indeed been making clear decisions about what they most wanted to accumulate. These decisions have primarily benefited two major kinds of risk assets. It is worth examining how this will affect the financial markets going forward.<br /><br />Only a relatively small percentage of this money which had come out of U.S. equity funds has gone back into the previous favorites, which includes funds based upon the Dow Jones Industrial Average, the S&amp;P 500, the Nasdaq, the Russell 2000, and similar index-based choices. Investors are progressively concluding that the best-known best-known benchmark U.S. equity indices are unlikely to keep making new all-time highs as they had routinely done in 2013-2014 and during the first several months of 2015. This is significant, because it probably means that we have transitioned from a bull market which lasted for roughly 6-1/4 years to a bear market which could persist for roughly another two years. It is also noteworthy that investors haven't just kept their money in cash, not just because cash pays almost zero interest, but because the overall percentage declines in their overall net worth have been modest. Investors tend to pile into cash when losses have been so dramatic that they are concerned more about additional red ink than they are about making money or anything else.<br /><br />Investors' tend to usually be obsessed with not missing out on rallies for the latest hot assets. Since their respective bottoms primarily in the late summer and early autumn of 2015, there have been two primary groups of outperforming securities: 1) the most popular individual names which have been soaring in recent weeks amidst widespread glowing media coverage; and 2) especially oversold and undervalued assets, some of which had suffered bear markets for several years. The second category includes most shares of commodity producers and emerging markets which mostly began their respective bear markets in April 2011 and which had generally suffered substantial losses of more than half and in some cases of more than three fourths.<br /><br />Let us consider each of these kinds of decisions. It is easy to see why investors would embrace the latest trendy names on Wall Street. With Oprah Winfrey buying a much-publicized stake in Weight Watchers (WTW), who could resist such a celebrity-laden endorsement? Similarly upbeat media coverage has also boosted the shares of stocks including Amazon (AMZN), Facebook (FB), and Google (GOOG). The kinds of investors who have been buying these shares are generally amateurs who watch cable TV and browse the internet periodically, and are especially attracted to stocks which have easily remembered stories and are familiar to them in their daily lives. Whenever a bull market is transitioning to a bear market, there will be fewer and fewer winners, so more and more people will want to own whatever is going up.<br /><br />There is a second group of securities which is much less widely known and which so far has continued to receive mostly gloomy media coverage and negative analysts' commentary. This includes the shares of nearly all commodity-related assets, including commodity producers and emerging-market shares. Since these achieved their respective multi-year and multi-decade bottoms primarily during the summer and early autumn of 2015, they have been among the most notable outperformers especially in subsectors including gold and silver mining which have been the biggest percentage winners during the past several weeks. Besides being much less well known than the securities listed in the previous paragraph, these have been far more popular with insiders and institutions rather than with individual investors. From a fundamental point of view, the big-name stocks listed in the previous paragraph are probably significantly overvalued and sport unusually high price-earnings ratios in the cases where they are actually making money. In sharp contrast, most commodity-related and emerging-market assets have especially low historic price-earnings ratios and are mostly trading far below their respective fair-value levels. These are compelling bargains in both absolute and relative terms.<br /><br />As more time passes, I believe that most of the widely popular favorites will tend to fade as they usually do as a bear market experiences a natural state of maturing. On the other hand, since they had become so unpopular, even a reduction in the gloomy tone of the media and analysts' commentary could be accompanied by substantial percentage gains for commodity-related and emerging-market assets. Since most of these have slumped so dramatically during their extended bear markets, many of them could double and even triple while still remaining far below their peaks of recent years. For example, FCG, a fund of natural gas producers, had plummeted by more than three fourths from its June 2014 top to its September 29, 2015 bottom of 5.43. If it merely regains half its June 2014 high then those who bought it near the bottom will end up doubling their money on those purchases which were made close to the nadir. Another example is GDX, which had slumped by roughly 80% to its September 11, 2015 nadir of 12.62 and has since been among the biggest winners of all exchange-traded funds. Funds of junior producers such as GDXJ had suffered even greater percentage declines and could thus be especially impressive in the intensity of their rebounds. Gains of hundreds of percent are possible without new highs having to be achieved. Similarly outsized percentage increases could be the most likely scenario for many subsectors related to mining and energy. If this were a horse race, these should be favorites but instead carry the odds of long-shot dark horses.<br /><br />It is noteworthy that the kinds of behavior which typified the bear markets for commodity producers and emerging markets have been much less prevalent in recent weeks. Early intraday lows tend to be followed more frequently by rebound attempts. Many of these shares have formed several higher lows in recent weeks. Insiders had mostly been significant buyers near all low points during the past several months, while fund outflows had reached all-time record extremes for many subsectors. Most analysts and brokerages have continued to reiterate the downside targets for these generally unpopular assets, so that hasn't yet been transformed into progressively more bullish commentary which will likely begin to occur more frequently in the near future. Since many of these securities have been among the biggest percentage winners in recent weeks, they are slowly attracting the attention of momentum players and other groups of potential buyers. Some of their purchases have been especially untimely, tending to occur following recent extended short-term strength which usually leads to a rapid short-term correction in order to shake out the sell stops which so many of these kinds of traders tend to employ. We saw such a rapid correction especially on Friday, October 16 and Monday, October 19, 2015, and there will likely be more of them whenever people have become too optimistic toward their short-term behavior. Eventually, I expect to see amateurs following insiders and institutions in becoming buyers, since they will observe that many of these assets have doubled, tripled, or better, and will hate to miss out completely on such strong rallies.<br /><br />As is usually the case during any bull market, the earliest buyers tend to be insiders and deep value accumulators. This tends to be followed by a wide range of buyers at each step on the way up, until finally amateurs are eagerly participating while insiders begin selling. I think that we are probably a very long way from having to be concerned that these rallies are over or nearly so--especially since so much of the commentary on the internet in recent days has suggested that these rebounds are finished and that these assets should be sold short. A rally for anything doesn't end with most people believing that new historic lows lie shortly ahead, but when almost everyone is asking themselves how much higher it is likely to go and how long it will take for various upside targets to be surpassed.<br /><br />Disclosure: In August-September 2013, and at various points during 2014-2015, I have been buying the shares of emerging-market country funds whenever they have appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. I have also been accumulating HDGE whenever U.S. equity indices are near their peaks; HDGE is an actively-managed fund that sells short U.S. equities. I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, SIL, XME, HDGE, COPX, GDX, EWZ, RSX, REMX, GLDX, URA, FCG, IDX, GXG, VGPMX, ECH, VNM, BGEIX, NGE, RSXJ, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position to roughly 3% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG when insiders were unloading, but I repurchased FCG in recent months following its collapse of more than three fourths of its June 2014 peak because there had been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&amp;P 500 to eventually lose about two thirds of its May 2015 peak valuation, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM had only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (IWC) marginally surpassed its zenith from March 6, 2014. The S&amp;P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-16824241438151910392015-09-26T07:53:00.001-07:002015-09-26T07:53:20.453-07:00"The stock market is almost magical because it always leads the economy. It goes down long before the economy drops and then heads higher long before the economy rebounds. It always has." --Kenneth L. Fisher<h3><div style="font-size: medium;"><a href="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a>INVESTORS HAVE BEEN SELLING BUT HAVEN'T YET DECIDED WHAT TO BUY (September 25, 2015): <span style="font-weight: normal;">If you look at the details of fund flows during the last several months, then you will discover that there have been net outflows from many funds of U.S. risk assets. This includes most U.S. equity and U.S. bond funds. As more and more time passes from the all-time peaks for many U.S. equity indices, investors are progressively realizing that the likelihood for additional gains is less than the probability that we have begun what could eventually become a full-fledged bear market. The S&amp;P 500 reached its highest point of 2134.72 on May 20, 2015, which was more than five months ago.</span></div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">Investors hate to tamper with the status quo if they are comfortable with it, so very few people sold near the spring highs. In recent weeks, there have been notable outflows especially on days when U.S. equities have been declining. The more that time passes and additional lower highs are registered for the S&amp;P 500, the Nasdaq, the Russell 2000, and similar indices, the more that people will realize that their portfolios are losing money rather than making money. Since the losses have been modest overall, these outflows haven't nearly approached the record withdrawals which were made during the first quarter of 2009. However, there has been a notable total decline in the money committed to U.S. risk assets, while the amount of money in safe deposits including money market funds has surged in recent months.</div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">One interesting observation is that, prior to the recent climb in the popularity of safe time deposits, these had reached all-time low levels relative to the amount of money invested in riskier assets. It is likely that, obtaining only around one percent interest or less on their bank accounts and near zero in their money market funds, many investors were encouraged to shift into far more speculative alternatives. They convinced themselves, with the able assistance of financial advisors, that they were nearly as safe in high-dividend blue chip U.S. stocks or high-yield corporate bonds as they were in the bank. In reality, they have been taking enormously greater risk, because most of these assets lost more than half their value during their respective bear markets of 2007-2009. However, most advisors politely didn't bring up this inconvenient fact, and most people would rather not think about what is possible while focusing instead on what is ideal.</div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">Now that reality has slowly begun to reassert itself, investors have been moving back into time deposits--but haven't yet taken more than a tiny percentage of this money and invested it in other assets. Historically, whenever there is a recent surge in safe time deposits, most of the money ends up being reallocated into securities which are perceived to contain greater upside potential. The only exception tends to be near the very end of a bear market, when risk assets are plummeting and investors are frightened into safety at any cost. Since we are far from such a situation today, asset reallocation usually means chasing after whatever has recently been climbing the most in percentage terms. If 2015 ends with a net loss for most U.S. equity and bond funds, then those funds which have enjoyed net gains will stand out noticeably among a sea of red. Other investors look for whatever has rebounded the most from its recent bottom, or for various kinds of moving average crosses and other signals. Therefore, whichever assets outperform from now through the end of 2015 are likely to be especially visible and to receive increasingly positive media, analyst, and advisor coverage. The persistence of such upbeat discussion will be accompanied by strong inflows.</div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">So far, there haven't been any sectors which have featured many such standout assets. However, this could change soon, because there is such a huge disparity between the world's most overpriced assets and the most undervalued ones. The list of overvalued securities includes many U.S. stocks and bonds and global real estate. The most compelling bargains can generally be found among commodity-related and emerging-market assets which in many cases have been trading at lower prices than during their worst levels of 2008-2009. Because they are so inexpensive, they can gain enormously in percentage terms and yet remain far below their respective peaks from the first half of 2008 or in many cases from April 2011. If this happens, then they will be able to continue to gain dramatically until the final months of 2016 or the early months of 2017.</div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">It is too early to say whether this kind of activity will occur or not, although historically most U.S. bull markets end with a period of rising inflationary expectations. It is rare for the economy to go into a recession without first experiencing an inflationary binge. During the most recent bear market of 2007-2009, we had a sharp and unexpected inflationary climb for roughly one year from the summer of 2007 through the summer of 2008. Since literally a hundred central banks worldwide including the U.S. Federal Reserve are eager for higher inflation, we are likely to get exactly what they want. Wage inflation has been moderately accelerating in the U.S., while prices have been generally slower to follow suit. Most investors are continuing to moderately sell their previous favorites, while sitting on the fence in indecision about what to do with the money. If you follow the fund flows during the next few months, you are likely to learn a lot about what will happen for another year or more.</div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">There are supporting clues from the media, which have become less enthusiastic about U.S. assets but continue to generally favor them because they appear to many to be the only game in town. Most news articles regarding commodities or emerging markets are gloomy, especially when there have been recent price declines for anything in these sectors. It appears that precious metals and the shares of their producers may already have bottomed, while energy producers are possibly following suit while emerging markets are mostly bringing up the rear. If all of these are able to outperform, then especially with the best-known U.S. benchmark indices continuing to struggle, investors will begin to take notice of the top-performing securities and will become increasingly eager to own them.</div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">The financial markets have always been a paradox, in which more people are eager to buy something after it has doubled than before it has done so. It is surely the same this time, so most people won't actually participate until it is too late to enjoy the lion's share of the potential percentage gains. If an asset goes from 10 to 50, then buying it at 20 might seem to surrender only one fourth of the profit since 20 is one fourth of the way from 10 to 50. However, the gain from 10 to 50 is 400% while the increase from 20 to 50 is 150%, so you actually give up 5/8 of the total profit instead of just 1/4. The financial markets are inherently geometric rather than arithmetic, which is why it works out this way. The key is that those who buy before a rally end up gaining far more than those who wait until a rebound has been "confirmed". Also, there is really no such thing as confirmation; whenever something has allegedly established a new uptrend, it often first suffers a sharp short-term correction to punish those who were tardy in jumping aboard the bandwagon.</div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">Tax tip: If you own shares or funds which are trading near multi-year bottoms and you are a U.S. resident, you can take advantage of their currently depressed prices if these assets are in your 401(k), 403(b), SEP-IRA, Keogh, traditional IRA, or other non-Roth retirement account. You can convert these shares from your account to a Roth IRA and pay taxes based upon their present low valuations. As these eventually rebound, all future gains will be completely tax free. In the event that these shares don't recover but end up retreating further in price, you can choose to undo your conversion, which is known as a recharacterization. You can then wait at least 30 days, or until the following calendar year--whichever is later--and then convert them again. There is no limit to how many times you can repeat this process and there are no income or other restrictions in making such conversions and recharacterizations, as long as each recharacterization is done on or before October 15 of the year following the date when the conversion had been done. It's like being able to go back in time and "unbuy" something which doesn't go up in price. It's heads you win, and tails you also win. Unfortunately, I do not know of an equivalent strategy which is permitted in any other country besides the United States.</div><br style="font-size: medium; font-weight: normal;" /><div style="font-size: medium; font-weight: normal;">Disclosure: In August-September 2013, and at various points during 2014-2015, I have been buying the shares of emerging-market country funds whenever they have appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. I have also been accumulating HDGE whenever U.S. equity indices are near their peaks; HDGE is an actively-managed fund that sells short U.S. equities. I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, XME, COPX, SIL, HDGE, GDX, REMX, EWZ, RSX, GLDX, URA, IDX, GXG, VGPMX, ECH, FCG, VNM, BGEIX, NGE, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position to roughly 3% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG but I have been repurchasing it following its recent collapse because there has been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&amp;P 500 to eventually lose about two thirds of its recent peak value, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM have only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (IWC) marginally surpassed its zenith from March 6, 2014. The S&amp;P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.</div></h3>TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-51616628987149709212015-08-04T13:57:00.000-07:002015-08-04T13:57:31.680-07:00Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." --Sir John Templeton<a href="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a><b>PERCEPTION AND REALITY CAN BE ENTIRELY DIFFERENT (August 4, 2015):</b> Many investors believe that the financial markets are driven by fundamentals, but in reality it is perception which is far more important. For example, if we compare April 2011 with August 2015, we can see that in April 2011 many commodity-related and emerging-market assets were extremely popular while U.S. equity indices were much less trendy. Thus, even though there wasn't much difference between profit growth in Brazil versus the United States, Brazilian equities were highly priced while U.S. shares were mostly undervalued. Today, it is the opposite, where valuations for Brazilian and most other emerging-market securities and currencies are especially cheap while nearly all assets in the United States are significantly overpriced. What happens is that investors don't actually seek out whatever is most compelling according to any logical system. Instead, they want to own whatever has recently been making money for their friends, and to sell whatever has been suffering the most extended downtrends. Such herd behavior thereby causes irrational extremes to be repeatedly created, until eventually there is an inevitable mean reversion which causes those who were following the herd to once again lose money.<br /><br />An especially sharp contrast between the real world and popular perception can be clearly observed in the gold market. Most people today will repeat what they usually hear in the mainstream financial media which is based upon a combination of myths and half-truths. Even the most ridiculous theories will be taken seriously if they appear to coincide with recent market behavior. Many people believe that a slowdown in China's economy has somehow caused commodities and the shares of their producers to lose significant percentages of their April 2011 high-water marks. In reality, China has been around for thousands of years, and its period of fastest growth was mostly the 1980s and 1990s when commodities generally plummeted around the world. So there is no true correlation between China's economy and commodity prices. Meanwhile, Chinese residents have surpassed India as the world's largest per-capita buyers of physical gold, so actually China has been supporting the gold price rather than causing it to drop. However, the simplistic "China is slowing so commodities are falling" myth involves a story which is easy to remember and to repeat to others, instead of the much more complex reality which takes many times longer to understand and requires studying a far greater quantity of financial data. Most people prefer an easy answer even if it is horribly inaccurate.<br /><br />Let's look at some of the quantifiable facts to see the actual state of the market, rather than its perceived state. For each futures contract, there are people known as commercials who are directly connected with the industry. With gold, for example, commercials include jewelers, fabricators, miners, and others who take physical possession of the metal in one way or another. Generally, commercials sell short gold in order to hedge their inventory; for example, a gold jeweler will sell short roughly the amount of their gold holdings so that, regardless of whether the price rises or falls, they don't experience either a net gain or a net loss. That way, they make a living from buying a little below the real price and selling a little higher, while not worrying about whether the gold price will rise or fall. However, from time to time, commercials don't bother to hedge because they aren't concerned about the possibility of a significant price decline. As of the most recent data which is released each Friday at 3:30 p.m. Eastern Time, gold commercials were net short 15,266 contracts. This was their smallest net short position since December 2001, more than 13-1/2 years ago, when gold was trading near 277 U.S. dollars per troy ounce.<br /><br />Thus, while analysts and brokerages almost unanimously expect gold to drop to one thousand dollars or lower, commercials who are the most knowledgeable about the gold market--and who have the most to lose if they are wrong--are betting the opposite way. Historically, whenever such an extreme disparity exists, the commercials almost always end up being correct. It's not just gold which sports such unusual numbers; for the Mexican peso which correlates closely with many other emerging-market currencies, the current commercial net long position of 94,252 contracts is an all-time record. With the Canadian and Australian dollars which also have a strong positive correlation with commodity prices, commercials are net long 81,035 loonie contracts and 81,970 aussie contracts. These are not all-time records but they are far above their historic averages and have increased dramatically in recent weeks.<br /><br />Because investors are bearish toward commodities, they have been making all-time record outflows from many commodity-related assets. The exchange-traded fund GLD of gold bullion has experienced the biggest-ever total outflow of any exchange-traded fund in history. For a brief period in 2011, its total market capitalization exceeded that of SPY to become the most popular ETF by market capitalization. In July 2015 alone, the net outflow from GLD was 38.74 tonnes to end July at 672.7 tonnes which marked its lowest level since March 2008. At the same time, lower prices have encouraged real buying of physical gold; according to the U.S. Mint, July 2015 coin sales increased by 469% (not a misprint) from July 2014. In other words, they were more than five times as great, representing 202,000 troy ounces of gold last month as compared with 35,500 ounces in July 2014. The total for the first seven months of 2015 was 38% higher than during the first seven months of 2014.<br /><br />As unpopular as gold and other commodities have been in recent weeks, the shares of their producers have been even more undervalued. XAU is an index of gold mining shares which has existed since December 19, 1983. This afternoon (August 4, 2015), XAU slumped to 45.14 where it hasn't traded since November 27, 2000--when gold was averaging about 266 U.S. dollars per troy ounce. This index has thus surrendered nearly all of its gains of the 21st century, with some of its components including Barrick Gold (ABX) trading at their lowest levels since the 1990s or earlier. While there are many attempts to explain this depressed state for gold and silver mining shares using fundamental arguments, it is almost entirely due to herding behavior. Practically no one wants to own gold mining shares regardless of how worthwhile it might be to do so, because almost no one else whom they know or respect seems to be eager to act in a similar manner. Of course this cuts both ways: as soon as various groups of investors beginning with deep value allocators begin to buy them and thereby push their prices higher, one group of investors after another will become increasingly eager to own them and will eventually create a buying cascade. Because they plunged so much in percentage terms on the way down, they could experience dramatic percentage gains merely to revisit their levels from recent years.<br /><br />The financial markets always represent the intersection of perception with reality. If investors believe that everyone else wants to own the Nasdaq but no one wants to own gold or gold mining shares, then they will sell gold and will buy the Nasdaq. Eventually, however, if the price of gold becomes absurdly low, then people can buy a lot of it to use as a store of wealth, for jewelry, for speculative investment, or for many other purposes. If the price of the Nasdaq is unreasonably high, then some companies will issue new shares to take advantage of the overpricing, while insiders will aggressively unload their own overpriced holdings. Whenever the shares of mining companies and energy producers become unreasonably cheap, then insiders will accumulate them as they have been doing. Eventually, one way or another, this will cause the most illogically underpriced and overpriced securities alike to periodically revert to fair value and usually far beyond to an equally irrational extreme in the opposite direction. Even assets which seem as though they will never become fairly valued, such as San Francisco or Vancouver real estate today, will eventually surprise almost everyone by experiencing mean reversion. It has been the nature of the financial markets to behave in this manner for millennia. No amount of technological innovation, Fed activity, or anything else can alter this basic inherent reality.<br /><br />Tax tip: If you own shares or funds which are trading near multi-year bottoms and you are a U.S. resident, you can take advantage of their currently depressed prices if these assets are in your 401(k), 403(b), SEP-IRA, Keogh, traditional IRA, or other non-Roth retirement account. You can convert these shares from your account to a Roth IRA and pay taxes based upon their present low valuations. As these eventually rebound, all future gains will be completely tax free. In the event that these shares don't recover but end up retreating further in price, you can choose to undo your conversion, which is known as a recharacterization. You can then wait at least 30 days, or until the following calendar year--whichever is later--and then convert them again. There is no limit to how many times you can repeat this process and there are no income or other restrictions in making such conversions and recharacterizations, as long as each recharacterization is done on or before October 15 of the year following the date when the conversion had been done. It's like being able to go back in time and "unbuy" something which doesn't go up in price. It's heads you win, and tails you also win. Unfortunately, I do not know of an equivalent strategy which is permitted in any other country besides the United States.<br /><br />Disclosure: In August-September 2013, and at various points during 2014-2015, I have been buying the shares of emerging-market country funds whenever they have appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. I have also been accumulating HDGE whenever U.S. equity indices are near their peaks; HDGE is an actively-managed fund that sells short U.S. equities. I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, XME, COPX, SIL, HDGE, GDX, REMX, EWZ, RSX, GLDX, URA, IDX, GXG, VGPMX, ECH, FCG, VNM, BGEIX, NGE, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position since June 2013 to roughly 3% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG but I have been repurchasing it following its recent collapse because there has been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&amp;P 500 to eventually lose about two thirds of its recent peak value, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM have only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (IWC) marginally surpassed its zenith from March 6, 2014. The S&amp;P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.comtag:blogger.com,1999:blog-4054477576344567058.post-7484765780597825542015-06-29T18:57:00.004-07:002015-06-29T18:57:33.607-07:00"Groups also make people feel safe, letting them take more dangerous courses. When people see others, or even past evidence of others, at a site, they keep to the established path even when they were trained to know better. If other people have done it, or are doing it, it has to be okay." --Esther Inglis-Arkell<div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s1600/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="http://4.bp.blogspot.com/--Kc7aEelB6I/Tg-BRv5Q1LI/AAAAAAAAAC4/7B9Xl2x_wxA/s200/Screen%2Bshot%2B2011-07-02%2Bat%2B4.30.05%2BPM.png" width="183" /></a></div><b>THE SECOND HALF OF 2015 WILL INTENSIFY TREND REVERSALS (June 29, 2015):</b> Most investors haven't even noticed that there have been critical changes in primary trends for most assets during the first half of 2015, and those which haven't yet changed direction are likely to do so soon. Among the first sectors to switch direction were numerous assets that pay above-average dividends including utilities (XLU), consumer staples (XLP), real-estate investment trusts or REITs (IYR), and U.S. Treasuries (TLT). All of the above performed extremely well during 2014, so when they appeared near the tops of the lists of best-performing securities, many people who love to own last year's winners bought them at the beginning of January 2015. Since then, all of the above have been in downtrends. Most analysts believe that these are merely intermediate-term corrections, but I believe it is far more likely that these downtrends represent the beginning of bear markets which will continue for two or three more years.<br /><br />Another key asset which likely reversed direction during the first half of 2015 was the U.S. dollar. The greenback peaked at a 12-year top versus most global currencies during the middle of March, and has since made numerous lower highs as can be seen in a chart of the U.S. dollar index. Most analysts and advisors are continuing to make investment recommendations as though the U.S. dollar is merely suffering a temporary decline and will soon surge to even higher highs, but I think that a much more likely scenario is for it to accelerate its downtrend. If this proves to be the case, then it will explain why most emerging-market currencies, emerging-market equities, and the shares of most commodity producers have been climbing also since the second or third week of March 2015. These uptrends have been even less noticed by most investors than the downtrends for high-dividend securities, partly because they tend to be relatively small in total capitalization and aren't followed as often by the average person. Many of these assets had been in bear markets since April 2011 and didn't bottom until near the end of 2014, in March 2015, or in some cases may not yet have completed their ultimate nadirs for the cycle. While most investors are aware that many popular securities had achieved all-time highs during the first half of 2015, far fewer people realize that most emerging-market and commodity-related assets had slumped to their lowest levels in roughly six years.<br /><br />One key feature of the financial markets is that perception can often take a very long time to catch up with reality. By Labor Day of 2008, we had already been experiencing a bear market for 15 months for small-cap U.S. equity indices and more than 10 months for the best-known indices, but almost no one believed that the bull market had really ended. By the time investors suffered through the Lehman bankruptcy and a subsequent plunge, it was too late to sell at favorable prices. The same thing will happen again this time, as people keep coming up with excuses not to sell when the S&amp;P 500 is above two thousand and end up once again panicking and selling the next time the S&amp;P 500 is below one thousand. People hate to sell high because they are convinced that there's nothing serious to worry about; when it is time to buy low, they find all kinds of gloomy reasons why they should procrastinate in taking action. We have experienced all of the negative divergences which are typical in the early stages of a bear market for U.S. equity indices, including 1) a dwindling number of new 52-week highs; 2) persistent insider selling except for commodity-related assets and a few other subsectors; 3) an increasing number of U.S. stocks which have begun bear markets; 4) increasingly poor overall market breadth; 5) the most knowledgeable investors have been among the most aggressive sellers while the least experienced participants have been the most eager buyers in recent months. As usual, investors won't pay attention to any of these signs until we have already experienced a sharp correction.<br /><br />One of the reasons for these reversals in behavior is that, after having been in a nearly deflationary environment for years, we are beginning to experience the early stages of a worldwide inflationary resurgence. Wages are rising in the United States and elsewhere. After having traded near their lowest levels in five to seven years, various commodities have begun to rebound--most recently and dramatically for agricultural products including corn, soybeans, and wheat which have been surging since the middle of June after having slumped to multi-year lows. Crude oil has been moderately rebounding since the middle of January 2015, while most energy-related commodities and the shares of their producers have been especially depressed and represent compelling bargains including natural gas producers (FCG), uranium mining companies (URA), and coal mining shares (KOL). Gold and silver mining companies have been far outperforming gold and silver bullion since March 10-11, 2015, and remain worth buying as they have been forming bullish patterns of numerous higher lows since then.<br /><br />Tax tip: If you own shares or funds which are trading near six-year bottoms and you are a U.S. resident, you can take advantage of their currently depressed prices if these assets are in your 401(k), 403(b), SEP-IRA, Keogh, traditional IRA, or other non-Roth retirement account. You can convert these shares from your account to a Roth IRA and pay taxes based upon their present low valuations. As these eventually rebound, all future gains will be completely tax free. In the event that these shares don't recover but end up retreating further in price, you can choose to undo your conversion, which is known as a recharacterization. You can then wait at least 30 days, or until the following calendar year--whichever is later--and then convert them again. There is no limit to how many times you can repeat this process and there are no income or other restrictions in making such conversions and recharacterizations, as long as each recharacterization is done on or before October 15 of the year following the date when the conversion had been done. It's like being able to go back in time and "unbuy" something which doesn't go up in price. It's heads you win, and tails you also win. Unfortunately, I do not know of an equivalent strategy which is permitted in any other country besides the United States.<br /><br />Disclosure: In August-September 2013, and at various points during 2014 through June 2015, I had been buying the shares of emerging-market country funds whenever they had appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares--and more recently energy shares--especially following their most extended pullbacks. Prior to the stock market's recent correction, I had also been accumulating HDGE which is an actively managed fund that sells short U.S. equities, because I believe that U.S. assets of almost all kinds have become dangerously overvalued. From my largest to my smallest position, I currently own GDXJ, KOL, XME, HDGE, GDX, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, FCG, VGPMX, BGEIX, VNM, NGE, PLTM, EPU, TUR, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled. I have reduced my total cash position since June 2013 to less than 4% of my total liquid net worth in order to increase my holdings in the above assets. I sold all of my SLX by acting whenever steel insiders were doing likewise. I also sold all of my FCG but I have been repurchasing it following its recent collapse because there has been intense buying by top corporate insiders of companies which produce natural gas. I expect the S&amp;P 500 to eventually lose about two thirds of its recent peak value, with its next bear-market bottom occurring within several months of October 2017. The Russell 2000 Index and its funds including IWM have only modestly surpassed their highs from the first week of March 2014, while the Russell Microcap Index (IWC) marginally surpassed its zenith from March 6, 2014. The S&amp;P 500 Index set a new all-time high on numerous occasions during the same period, and may have completed its final top for the cycle at 2134.72 on May 20, 2015. This marks a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of previous bear markets are doomed to repeat their mistakes.TrueContrarianhttp://www.blogger.com/profile/05575216642502380329noreply@blogger.com